The Hindu Business Line : Banks seek status quo on investment categorisation

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Banks seek status quo on investment categorisation

‘Marking them to market again will result in losses’

C. Shivkumar

Bangalore, Oct 22 Ahead of the Credit policy banks have sought status quo for categorisation of investments in their portfolios. Currently, investments are categorised as Held-to-Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT).

Under current guidelines of the Reserve Bank of India, banks are allowed to hold up to 25 per cent of their Demand and Time Liabilities in the HTM category. Investments in the HTM category are valued on the basis of acquisition costs. Basel II guidelines however have no such distinctions and all investments are expected to be valued on a marked-to- market basis.

Little need to speed up

High level bankers though said that they preferred to continue with this categorisation even after migrating into Basel II next year. Currently, outstanding investments of the banking sector are around Rs 9.25 lakh crore. Close to 95 per cent of the investments are held in the form of Government securities.

Banks have taken the position that many of the member nations of the Bank for International Settlements were yet to accept the Basel II guidelines. Consequently, there was little need for India to accelerate the migration into the new international regime.

Other fears

Bankers also have other fears. This was in view of the prevailing rates of interest and uncertain global environment. Bankers said that the marking of investments to a marked-to-a-market basis, would hurt the balance sheet of some of the banks. This was despite the fact that almost the entire banking sector in the country had brought down the average maturity to about three years.

In the case of the HTM categories, bankers said that the average maturities were still about 5 years plus. In fact, bankers said that some of them have already taken the hit on their balance sheets in 2004 itself, when the RBI permit permitted 25 per cent of the DTL (Demand and Time Liabilities) in the HTM category.

The losses incurred then on account of the transfer, have already been amortised by almost all the banks. Bankers fear that changing the categorisation and marking them to market again in line with Basel II would jeopardise their respective balance sheets.

Hardening yields

This was especially at a time when there were already fears of a liquidity tightening and with consequent impact on investments in the form of hardening yields or depreciation in the value of the investments. This fear stemmed from the hedge fund exit from domestic equity markets. Besides, oil prices, that also have a major impact on domestic liquidity, are ruling above $85 a barrel. This fear was one of the major reasons for bankers to remain biased to short-term securities particularly T-bills. Moreover, the bankers said that current liquidity situation was unlikely to last long, once the credit pick up begins.

Credit growth was already beginning to show incipient signs of a pick up, ahead of the beginning of the peak season, beginning next month. Credit-deposit ratios are currently at 71 per cent.

Further, the bankers said that the global yields were also expected to harden as countries such as China, Japan and Korea begin to dump US treasuries. This was likely to prompt more FII exits from the domestic markets to take advantage of the high yields back home, with a consequent impact on liquidity.

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