Banks’ burden:Bond yields may increase further following RBI’s forecast for higher inflation.Reuters  

The Reserve Bank of India has decided to allow urban co-operative banks (UCB) to convert into small finance banks (SFB), a move aimed at bringing these entities into mainstream banking.

“It has been decided to allow voluntary transition of UCBs meeting the prescribed criteria into SFBs,” the RBI said in its monetary policy statement on Wednesday, adding that a detailed scheme will be announced shortly.

UCBs had been facing financial trouble till a few years ago, prompting the RBI to stop issuing fresh licences. But their performance has improved recently while their numbers have come down due to mergers and closures. UCBs currently face regulation by both the RBI and the respective State governments. By turning into SFBs, they will be regulated only by the RBI.

The regulator has also allowed all banks to spread their mark-to-market losses for the April-June quarter, equally over four quarters.

“It has been decided to grant banks the option to spread the mark-to-market (MTM) losses on investments held in ‘Available for Sale ’ and ‘Held for Trading’ portfolio for the quarter ending June 30, 2018, equally over... four quarters, commencing from the quarter ending June 30.”

Rising yields

Rising bond yields have resulted in MTM losses for banks. Bond yields and prices are inversely related.

Yields have hardened in the last two quarters, impelling the RBI to allow similar relaxation earlier. Bond yields may harden further as the RBI raised inflation forecast for this year in Wednesday’s policy review, and cited rising crude prices as a source of uncertainty.