Traders demand yields, banks hate it.

"Thirteen state banks have reported combined losses of $8.6 billion for the year to March -- including $6.5 billion in the last quarter -- and their non-performing loans have surged nearly a fifth from end-December levels," said a report by Reuters. This despite the government spending $32 billion to recapitalize public sector banks. State Bank of India, India's largest bank reported a loss of $1.1, the largest in its history, in the March quarter. This is due to the Reserve Bank's insistence on classifying any loan as non-performing asset, NPA, if interest or installment of principal is overdue by more than 90 days. Gross NPAs in our banks amounted to a total of Rs 8.41 trillion in December 2017. In the event of a default a company will have 180 days to pay up or face bankruptcy proceedings. Around 2,100 terrified companies have paid Rs 830 billion to settle their dues but sale of $210 billion, or Rs 14 trillion, worth of stressed assets is held up because bankers are afraid of being accused of selling at a cheaper price to favored buyers. The problem with bad loans is that banks are reluctant to lend until their books are clean, which reduces funding for new projects. The corporate bond market in India is much smaller than other developing economies and companies depend on bank loans for capital. On the other hand, there is a big market in government bonds, or gilts, which are used by the RBI to borrow money from the market to fund the fiscal deficit, which is the excess of expenditure over revenue in a financial year. Under Statutory Liquidity Ratio banks are required to hold 19.5% of total deposits in government bonds, gold or cash. In the absence of reliable lending opportunities the banking industry already holds around 29% in government bonds and exposure of public sector banks is even higher, wrote T Bandopadhyay. Banks hold government bonds in three buckets -- "held-to-maturity (HTM), available for sale (AFS) and held for trading (HFT)". Bonds held for AFS and HFT have to be valued at market prices, mark to market, and when prices fall the asset values of banks also fall. "Between August 2017 (when RBI cut its policy rate to 6% -- the last rate cut) and end-February 2018, the yield on 10-year paper rose by 160 bps, from 6.38% to 7.98%." Yields rise when the market price falls which means banks are losing on their assets. "There is a sudden rush to sell bonds by banks." More selling pushes price down, further raising yields and increasing losses. Banks are forced by the government to lend to "priority sectors" which are small and marginal farmers and micro enterprises but banks do not know how to evaluate risks of these sectors. The solution is to ring fence a large part of depositors money, making it more difficult for companies to borrow from banks and declare bad loans immediately. Poor banks. They can only take orders.