RBI proposes to add corporate bonds in HTM category of banks – World Affairs SRS

RBI proposes to add corporate bonds in HTM category of banks

– World Affairs SRS

The Reserve Bank of India (RBI) on Friday proposed to allow banks to hold corporate bonds, or even equity shares of subsidiaries, associates and joint ventures, in the maturity range (HTM) of their investment books.

Investments in the HTM category are not required to be valued at the current market price, and hence, banks do not incur a mark-to-market loss if the current market prices of the instruments fall.

Earlier, only government and state government securities, and certain securities by infrastructure companies were allowed in the HTM category. Also, banks were not allowed to keep more than 25 per cent of their total investments in this category.

In a draft discussion paper on prudential norms on investment by banks, the central bank proposed removal of the limit on investment in HTM as a percentage of total investment and also removal of the limit on SLR securities. Feedback on the draft can be given till February 15.

According to experts, this will allow banks to buy more bonds for both government and corporates, thereby increasing the investor base for these securities.

However, “the controls for sale from HTM (with the exception of certain existing exemptions) shall be tightened to ensure that the basic principles and principles for classification of securities as HTM and valuation of them at cost are not invalidated,” stated in the draft discussion paper.

For example, “Debt instruments having only fixed or stipulated payments and intended to hold till maturity with fixed maturity shall be classified under HTM”. It can also be corporate bonds, whereas the central bank made exceptions for the equity of subsidiaries.

The investment portfolio of banks will be classified into fair value through HTM, Available for Sale (AFS) and Profit and Loss Account (FVTPL). Within the FVTPL, Held for Trading (HFT) will be a sub-category.

FVTPL will be the residual category where all investments that are not eligible to be included in HTM or AFS will be classified. This category may include investments such as securitization receipts (SRs), mutual funds, alternative investment funds, equity shares, derivatives (including those made for hedging) with no contractually specified periodic cash flows that are fully paid off. Interest can be kept on the principal and outstanding principal.

In either of these categories, when valuing assets initially, if the security cannot be assessed due to lack of market quotes, losses should be recognized immediately, while gains should be deferred.

Securities held in HTM will have to be carried at cost and will not need to be marked to market after initial recognition with any discount or premium if amortized over the life of the instrument. However, valuation of these assets is to be done on quarterly basis to take into account any permanent decrease in value and loss, if any, should be debited to profit and loss account, RBI said.

The central bank also said that it is ready to review some of its existing norms on valuation of assets based on market reaction.

For example, the current norms say that AFS/HFT requires a loss but any net increase in value is ignored.

“In addition to not being in line with global standards, such asymmetric treatment hinders the development of derivatives markets, which could be used for hedging risk,” the draft said.

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