Corporate bonds

RBI proposes to add corporate bonds to banks’ HTM category

The Reserve Bank of India (RBI) on Friday proposed to allow banks to keep corporate bonds, even 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 do not have to incur market price losses if the current prices of the instruments fall in the market.

Previously, only state and state securities and certain infrastructure company securities were allowed in the HTM category. In addition, banks were not allowed to keep more than 25 percent of their total investments in this category.

In a draft discussion paper on prudential standards on bank investments, the central bank has proposed removing the cap on investments in HTM as a percentage of total investments as well as the cap on SLR securities that can be held there. Comments on the project can be given before February 15.

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

However, “non-HTM sales controls (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 invalidated,” the draft says. of working document.

For example, “only debt securities with fixed or determinable payments and fixed maturity with the intention of holding them to maturity will be classified as HTM”. It can even be corporate bonds, while the central bank has made exceptions for subsidiary stocks.

The banks’ investment portfolio will be classified into HTM, available for sale (AFS) and fair value through profit and loss (FVTPL). Within the FVTPL, held-for-trading (HFT) securities will be a sub-category.

The FVTPL will be the residual category into which all investments that are not eligible for inclusion in HTM or AFS will be classified. This category may have investments such as securitization receipts (SR), mutual funds, alternative investment funds, stocks, derivatives (including those undertaken for hedging purposes), among others, which do not have contractually specified periodic cash flows that are principal payments only and interest on outstanding principal may be retained.

In each of these categories, upon initial valuation of assets, if a security cannot be valued due to lack of market quotations, losses should be recognized immediately while gains should be deferred.

Securities held in HTM will be required to be carried at cost and will not require mark-to-market after initial recognition, with any discount or premium on acquisition being amortized over the life of the instrument. However, these assets should be valued on a quarterly basis to account for any permanent decrease in value and the depreciation, if any, should be debited from the profit and loss account, the RBI said.

The central bank also said it was open to revising some of its existing asset pricing standards, based on market feedback.

For example, current standards state that AFS/HFT must require 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 says.

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