the Reserve Bank of India (RBI) on Friday proposed allowing banks hold corporate bonds, or even equity shares of subsidiaries, associates and joint ventures in the held-to-maturity (HTM) category of their investment books.
An investment in the HTM category does not need to be valued at the current market price, and therefore, banks You do not have to incur losses in market value if the current prices of the instruments fall in the market.
Previously, only government and state government securities, and certain infrastructure company securities were allowed in the HTM category. Then, banks they were not allowed to keep more than 25 percent of their total investments in this category.
In a draft discussion paper on prudential rules on bank investments, the central bank proposed removing the cap on investments in HTM as a percentage of total investments and also the cap on SLR securities that can be held there. . Comments on the draft can be submitted before February 15.
This, according to experts, will allow banks to buy more bonds, both government and corporate, thus increasing the investor base for these securities.
However, “controls for non-HTM sales (barring certain existing exemptions) will be strengthened to ensure that the basic principles and principles for classifying securities as HTM and valuing them at cost are not overridden,” the draft document said. of discussion.
For example, “only debt instruments with fixed or determinable payments and fixed maturities intended to be held to maturity will be classified as HTM”. This may even be corporate bonds, while the central bank made exceptions for shares of subsidiaries.
The banks’ investment portfolio will be classified as HTM, available for sale (AFS) and fair value through profit and loss account (FVTPL). Within FVTPL, Held for Trading (HFT) will be a subcategory.
The FVTPL will be the residual category where all investments that do not qualify for inclusion in HTM or AFS will be classified. This category may have investments such as Securitization Receipts (SR), mutual funds, alternative investment funds, equity shares, derivatives (including those assumed for hedging), among others, that do not have contractually specified periodic cash flows that are solely Principal and interest payments on outstanding principal may be preserved.
In any of these categories, in the initial evaluation of assets, if a security cannot be evaluated due to lack of market quotations, losses must be recognized immediately and gains must be deferred.
Securities held in HTM must be carried at cost and will not require trading after initial recognition with any discount or premium on acquisition that will be amortized over the life of the instrument. However, these assets must be assessed on a quarterly basis to account for any permanent decline in value and impairment, if any, must be charged to the profit and loss account, the RBI said.
The central bank also said it was open to revising some of its existing rules on asset pricing, based on market feedback.
For example, current rules say that the AFS/HFT should call for losses, but any net appreciation in value is ignored.
“In addition to not being aligned with global standards, such asymmetric treatment stifles the development of derivatives markets that could be used to hedge risk,” the draft said.