Mumbai: India’s central bank has suggested changes to the valuation of bank investments, including relaxing rules on a key class of long-term investments that are shielded from frequent valuation changes, but tightening those on shifting securities between classes.
A Reserve Bank of India (RBI) discussion paper released late Friday suggests removing caps on the Held-To-Maturity (HTM) class of securities, and allowing more types of instruments to be held within them. However banks will not be allowed to sell more than 5 per cent of their investments in this class per year, barring specified exceptions, under the proposed rules.
RBI has proposed allowing banks to keep corporate bonds, or even equity shares of subsidiaries, associates and joint ventures in the held-to-maturity category (HTM) of their investment books.
An investment in the HTM category doesn’t require to be valued at the current market price, and therefore, banks do not have to incur mark-to-market losses if the current prices of the instruments dip in the market.
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 investments by banks, the central bank proposed removing the ceiling on investments in HTM as a percentage to total investments and also the ceiling on SLR [statutory liquidity requirement] securities that can be held there. Feedback on the draft can be given by February 15.
This, according to experts, will allow banks to buy more bonds, both government and corporate, thereby increasing the investor base for these securities.
The discussion paper proposed that the suggested framework come into effect from April 1, 2023.
It also recommended that the local accounting watchdog update its current strict rules on the treatment of derivatives, which the central bank will then ask banks to follow. The paper noted that current rules may have stunted the development of the rates and credit derivative markets.
