Mumbai: Record-low interest rates didn’t immediately trigger demand for loans in Covid-ravaged India, but falling yields across the board sustained a bond rally that allowed many state-run banks to log profits for the first time in five years.

They reported a net profit before tax (PBT) in FY21 of about ₹45,900 crore, of which more than two-thirds came from bond portfolios, show data from ICRA. Those government banks earned PBT of ₹31,600 crore in bond sales. When bond yields fall, prices rise.

“As the scope for further rate cuts is limited with a possible reversal of the policy stance after January next year, the incremental gains could be modest this year,” said Anil Gupta, vice-president–financial sector ratings, ICRA. “Taking advantage of yields movement, banks timely booked gains on their bond holdings. The yields have now aligned closer to the market yield after profit booking.”

Between FY16 and FY20, these banks incurred losses on average. Besides bond gains, lower credit provisions on legacy bad loans boosted profitability.

Typically during the first quarter of a financial year, banks are permitted to interchange a portion between two categories of portfolios including Hold-To-Maturity (HTM) and Available for Sales (AFS). High-yielding papers were likely shifted out of HTM to AFS, which lenders sell to book profits. Similarly, new bonds, closer to market yields could be shifted to HTM that does not pose mark-to-market loss risk.

“We had instructions to make profits as much as you can from bonds as usual business took a big hit,” said a senior dealer from a PSU bank.

“Bond gains act as a counter-cyclical buffer,” said Anand Bagri, head of domestic markets at . “Overall interest rates are generally benign when credit demand is low, leading to gains in the bond investment portfolio and healthy trading gains.”