Recapitalisation bonds to face mark-to-market provision, says RBI

The Reserve Bank of India (RBI) has said that banks that have received recapitalisation bonds from the government in 2021-22 should recognise these bonds at market value. This means that banks have to make a  mark-to-market (MTM) provision if their market value falls below the acquisition value.

“It is clarified that investments in special securities received from the government of India towards bank’s recapitalisation requirement from FY2021-22 onwards shall be recognised at fair value /market value on initial recognition in HTM,” the banking regulator said in a notification.

“The fair value/market value of these securities shall be arrived on the basis of the prices/YTM of similar tenor central government securities put out by Financial Benchmarks India Pvt. Ltd. (FBIL). Any difference between the acquisition cost and fair value arrived as above shall be immediately recognised in the Profit and Loss Account,” the notification said.

The government, from time to time, issues bank recapitalisation bonds to public sector banks. These securities are named Special GoI security, are non-transferable and aren’t eligible investment and are held under held-to-maturity (HTM) portfolio without any limit.

The RBI also said that “…investments classified under HTM shall be carried at acquisition cost, with the premium over the face value being amortised over the tenor of the instrument. It is expected that the acquisition of such instruments shall be at the fair value of the security at the time of its acquisition”. It added that the same instruction also applies to re-capitalisation bonds received from the government towards banks’ recapitalisation requirements.