The Hindu Business Line : Norms for classification of banks' investments in securities revised

The banks' boards will fix internal limits for holdings in HTM category, which should be followed on a consistent basis at least for 3 to 5 financial years, without any change.

Mumbai , July 12

Banks may henceforth find it difficult to shift their portfolio of securities from held-to-maturity (HTM) category to available-for-sale and vice-versa as and when the interest rates rise or fall.

This is because the Reserve Bank of India has stipulated conditions for shifting of portfolio from and to HTM under its revised guidelines on classification of banks' investments issued today.

As per the revised guidelines, investment in a financial asset cannot be classified as HTM if the bank intends to hold it for an undefined period, if it is planning to sell the asset in response to changes in market interest or risks, liquidity needs, changes in availability of and yield on alternative investments, changes in financing sources and terms or changes in foreign currency risk.

"Earlier, banks were shifting to HTM when interest rates were increasing so that they could avoid providing for depreciation.

"Then if the interest rates fell, banks were tempted to take the securities out of HTM and book profits. The new RBI guidelines makes it difficult for banks to do this anymore," said a senior bank official.

The guideline also prevents an investment from being classified as HTM if the issuer has a right to settle the financial asset at an amount significantly below its amortised cost.

This means, if a bank agrees to settle a corporate bond for 80 per cent of its value in case the issuer is a non-performer, then such an investment cannot be classified as HTM.

The RBI guideline says, "Banks should weed out ineligible securities held in HTM category and shift these securities to allowed-for-sale (AFS) category any time during the first calendar quarter in which these guidelines become effective."

As per the new guidelines, the banks' boards will fix internal limits for holdings in HTM category, which should be followed on a consistent basis at least for three to five financial years, without any change.

"While the limit can be decided by the bank board, the bank cannot change the classification of the investment unless there is a serious reason.

"Earlier, banks were blindly asking for increasing the limit in HTM. With the new classification, they will hesitate before shifting securities to HTM," the official said.

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