THE HINDU Editorial Vocabulary- January 17, 2018 - Topic 2

Face the inevitable

The spike in bond yields

The sharp rise in bond yields has hit banks with losses on treasury operations dominated by sovereign bond holdings. Rating agency ICRA believes the fall in bond prices on expectation of the Central government breaching its fiscal deficit target has led to banks suffering a loss on paper of over ₹15,500 crore in the quarter that ended in December. 

The yield on Indian 10-year benchmark government bonds has risen steeply, from about 6.5% at the end of August to 7.56% on January 16. Even the yield on newly issued 10-year bonds that would mature in 2028 has inched up 27 basis points since January 5. Bankers have pleaded that the Reserve Bank of India allow them to stagger the reporting of these losses over several quarters. In seeking leeway, they have pointed to the huge burden imposed on their balance sheets by non-performing assets clogging the banking system. After all, India’s banks, flush with cash since demonetisation, are the largest (and captive) holders of government bonds, thanks to a regime that requires them to maintain a high proportion of assets in them. That deposits have grown while credit offtake has not, makes matters worse. But seeking regulatory forbearance is not the solution. This argument may not find much traction with the banking regulator, going by Deputy Governor Viral Acharya’s remarks on Monday.

Any kind of accounting chicanery that makes the books look rosy will come at the cost of the accuracy with which banks reflect their financial health. Banks, which are supposed to be good at assessing not just creditors’ credibility but also the broader trends in the economy and the financial markets, cannot feign surprise at a rise and fall in bond yields. As Mr. Acharya has pointed out, banks understand the impact of interest rate movements and the risks of bond investments, and they perhaps choose to ignore this thanks to a “heads I win, tails the regulator dispenses” mindset. Just as banks need to be held accountable for their lending decisions and their advances, treasury operations and bond investments also need accountability and risk management systems. After all, there are trained professionals handling their large bond market operations who know of the principles of asset allocation and the hedging of risks. Banks should simply step up their game and address the reasons for their investment losses instead of resorting to measures aimed at hiding their problems. Any temporary measure, such as the request to stagger the recognition of bond losses, will only worsen it. Moreover, irrespective of the accounting standards banks are asked to follow, the markets can easily call this bluff and bid down their share prices.

Vocabulary

Treasury: the funds or revenue of a government, corporation, or institution.

Example: The country's pledge not to spend more than it has in its treasury

Synonyms: coffers, purse, finance department, bank, revenues, finances

Expectation: a strong belief that something will happen or be the case in the future.

Example: Reality had not lived up to expectations

Synonyms: supposition, assumption, presumption, conjecture, surmise

Antonyms: astonishment, consummation, despair, doubt, doubt

Breach: an act of breaking or failing to observe a law, agreement, or code of conduct.

Example: A breach of confidence

Synonyms: contravention, violation, infringement, infraction

Stagger: walk or move unsteadily, as if about to fall.

Example: He staggered to his feet, swaying a little

Synonyms: lurch, walk unsteadily, reel, sway, teeter, totter, stumble

Leeway: the amount of freedom to move or act that is available.

Example: The government had several months' leeway to introduce reforms

Synonyms: freedom, scope, latitude, space, room, liberty, flexibility

Flush: become red and hot, typically as the result of illness or strong emotion.

Example: Mr. Cunningham flushed angrily

Synonyms: blush, redden, go pink, go red, go crimson, go scarlet

Antonyms: poor, uneven

Assess: evaluate or estimate the nature, ability, or quality of.

Example: The committee must assess the relative importance of the issues

Synonyms: evaluate, judge, gauge, rate, estimate, appraise, consider

Feign: pretend to be affected by a feeling, state, or injury.

Example: She feigned nervousness

Synonyms: simulate, fake, sham, affect, give the appearance of, make a pretense of

Dispense: distribute or provide a service or information to a number of people.

Example: He dispensed a gentle pat on Claude's back

Synonyms: distribute, pass around, hand out, dole out, dish out, share out

Antonyms: cling to, collect, consolidate, divide arbitrarily

Resort: a place that is a popular destination for vacations or recreation, or which is frequented for a particular purpose.

Example: A seaside resort

Synonyms: vacation spot, tourist center, vacationland, retreat, spa

Recognition: the action or process of recognizing or being recognized, in particular.

Synonyms: identification, recollection, remembrance

Antonyms: ignorance, illiteracy, inexperience, misapprehension

Bluff: direct in speech or behavior but in a good-natured way.

Example: A big, bluff, hearty man

Synonyms: plain-spoken, straightforward, blunt, direct, no-nonsense, frank

Antonyms: indirect, gradual