Non-SLR bond inclusion in HTM expected to deepen corporate bond market

The inclusion of corporate bonds in the Held to Maturity (HTM) portfolio is expected to invigorate the corporate bond market, according to market participants.

"Adding corporate bonds to the HTM category should revitalise the corporate bond market and narrow the spreads," said Madhavi Arora, lead economist at Emkay Global.

The Reserve Bank of India (RBI) has updated its investment guidelines for commercial banks. Effective from April 1, 2024, banks will categorise their entire investment portfolios, excluding investments in their own subsidiaries, joint ventures and associates, into three classifications: Held to Maturity (HTM), Available for Sale (AFS), and Fair Value Through Profit and Loss (FVTPL).

"In the Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023, classification is not based on the criteria used to differentiate between Statutory Liquidity Ratio (SLR) and non-SLR securities," the central bank stated in a press release on Tuesday. "The classification is determined by the objective for acquiring the security and the Solely Payments of Principal and Interest (SPPI) criterion. Therefore, both SLR and non-SLR securities meeting SPPI criteria can be categorised under HTM, AFS, or FVTPL, depending on the acquisition purpose," the release added.

Bank treasury heads believe that the inclusion of non-SLR securities in HTM portfolios may spur activity in the corporate bond market. "Many banks hold a significant volume of corporate bonds; this change could stimulate the corporate bond market and narrow the gap between government securities and corporate bonds," said the treasury head of a private bank.

However, there are restrictions on investing in non-SLR securities with an original maturity of less than one year. "Banks are not permitted to invest in non-SLR securities with an original maturity of less than one year. This limitation does not apply to investments in Commercial Paper, Certificates of Deposit and Non-Convertible Debentures (NCDs) with an original or initial maturity of up to one year issued by companies, including Non-Banking Financial Companies (NBFCs), which fall under RBI guidelines," the RBI release clarified.