Banks urge RBI to extend HTM leeway beyond Mar 2023 as bond losses pile up | Business Standard News

Clipped from: https://www.business-standard.com/article/finance/give-htm-latitude-of-bond-portfolios-beyond-march-2023-banks-to-rbi-122072001134_1.html

Bankers have sought permission to park a larger quantum of securities in the portfolio than is currently permitted amid an environment of rising bond yields.

Photo: Bloomberg

Photo: Bloomberg

Commercial banks have requested the Reserve Bank of India (RBI) to extend dispensation on the held-to-maturity (HTM) portion of bond portfolios beyond March 2023 in a recent meeting, sources told Business Standard.

Bankers have sought permission to park a larger quantum of securities in the portfolio than is currently permitted amid an environment of rising bond yields.

Banks wanted more HTM and greater clarity on whether there would be an extension of the timeline. This dispensation is until March 2023. What happens if a bank buys a bond after March 2023? It has to be marked-to-market (MTM) and becomes a challenging situation,” said a source in the know.

“Right now, the carry is agreeable, but everybody is cautious about MTM. Most public sector banks (PSBs) are also listed. There are worries about quarterly performance,” said a source.

In April, the RBI enhanced the existing HTM limit of 22 per cent of deposits to 23 per cent and permitted banks to include securities acquired between April 1, 2022, and March 31, 2023, under the enhanced limit of 23 per cent.

The central bank said that the enhanced HTM limit of 23 per cent would be reduced to 19.5 per cent in a phased manner, beginning from the quarter ended June 30, 2023.

The HTM book offers protection against treasury losses since securities kept in the portfolio are exempt from being MTM.

Bond yields and prices move inversely, resulting in MTM losses suffered on bond portfolios in a rising yield environment. Given that banks are required to set aside provisions for MTM losses, rising bond yields, therefore, dent profitability.

With the RBI having lifted the repo rate by 90 basis points (bps) since May to tackle elevated inflation, yields on government securities (G-secs) have climbed sharply. The 10-year benchmark bond yield jumped 61 bps to 7.45 per cent in April-June.

The other two bond portfolios — the available-for-sale (AFS) book and held-for-trading (HFT) book — are MTM and at risk of losses in the present-day milieu. Securities from the AFS book can be sold any time; those in the HFT book must be sold within 90 days.

A recent report by rating agency ICRA said hardening bond yields may cause Indian banks to incur MTM losses to the tune of Rs 10,000-13,000 crore in their bond portfolios in the quarter ended June.

The adverse impact of hardening of yields is expected to be felt most by PSBs, given their higher holding of G-secs of a longer tenure, the rating agency said.

Longer-tenure securities pose greater MTM risk on bond portfolios as prices of these swing sharply, relative to a minor movement in their yields.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s