Banks may increase HTM holdings to reduce treasury book volatility

Although sales from the HTM category are still permitted, internal reclassifications can now only occur under exceptional circumstances

Banks are likely to increase their held-to-maturity (HTM) holdings to reduce volatility in their books of accounts, as the upper cap of 23 per cent on HTM holdings has been removed, according to the revised investment norms by the Reserve Bank of India (RBI), said market participants.

Moreover, the RBI has placed a limit on the sale of HTM assets, restricting it to a maximum of 5 per cent of their initial carrying value. While this 5 per cent sale from the HTM category is still permissible, internal reclassifications are now only allowed in extraordinary circumstances.

Importantly, the new norms have eliminated the 90-day ceiling on the holding period under held for trading (HFT), meaning banks are no longer required to sell securities within that period. This change allows banks to sell at more opportune times.

Madhavi Arora, lead economist at Emkay Global, said, “This change will be beneficial to banks as they can now book profits in the HFT portfolio when gains may be substantial, rather than time-bound selling.”

Previously, banks had the flexibility to sell 5 per cent of their HTM bonds throughout the year, and once a year, commercial banks were permitted to transfer their bonds designated as ‘held-to-maturity’ to their ‘available-for-sale’ (AFS) books. This one-time adjustment took place in early April and included government bonds and state government securities.

Krishnan Sitaraman, senior director and chief ratings officer at CRISIL Ratings, said, “Banks can increase HTM holdings and thus reduce volatility in their treasury books in response to mark-to-market (MTM) gains or losses in the books under AFS/HFT categories when interest rates change.”

He added, “Reclassification of investments will require the RBI’s approval, so we may observe lower turnover in the investment books of banks.”

Securities in the HTM category are shielded from MTM losses. With the removal of the 23 per cent ceiling, if banks include more securities in this category, they will be protected from sharp interest rate movements. Earlier this year, the US-based Silicon Valley Bank collapsed due to mounting MTM losses resulting from an aggressive rate hike by the US Federal Reserve, the most significant in four decades, aimed at curbing inflation.

Starting April 1, 2024, once these updated RBI regulations are implemented, banks will categorise their complete investment portfolio (excluding investments in their own subsidiaries, joint ventures, and associates) into three groups: HTM, AFS, and fair value through profit and loss (FVTPL).

The norms stipulate that securities classified under the HFT sub-category within FVTPL should be fair valued on a daily basis, while other securities in FVTPL will be fair valued at least quarterly, if not more frequently.

Arun Bansal, ED head of treasury at IDBI Bank, said, “Most public sector banks are currently keeping 25-26 per cent in SLR books, and some banks even have 28 per cent. So, they are likely to increase their HTM holdings. Longer-term paper will be kept in HTM, while shorter-duration papers will fall under AFS and FTPL.”