RBI’s draft rules could rev up corporate bond market
Move will save banks from making additional provisions for potential mark-to-market losses
The domestic corporate bond market could see greater participation from commercial banks if the Reserve Bank of India (RBI) implements a proposal to categorize corporate bonds as held-to-maturity (HTM) in the investment books of banks.
Senior bankers said such a move by the central bank would save lenders from making mandatory additional provisions for potential mark-to-market losses. “In the new regime, banks will have the freedom to keep more investments, including corporate bonds in the HTM category. Profits from sale from HTM will not be permitted to be taken to profit and loss (P&L) account. Instead, it will have to be directly taken to reserves. In addition, there will be limitation on sales from HTM. Hence, these changes will likely have an impact on the banks’ reported P&L,” said Neeraj Gambhir, group executive—treasury, markets and wholesale banking products, Axis Bank.
RBI has also proposed removing the ceiling on investments in HTM as a percentage of total investments, and also the ceiling on holding Statutory Liquidity Ratio (SLR) securities. This could also lead banks to purchase more bonds, both government and corporate, increasing the investor base for such securities.
Bankers also believe that the current guidelines could also reduce losses incurred on the trading book of banks. For instance, under the current guidelines, a rising interest rate scenario would have led to higher provisions because of the investments carried in the AFS (available-for-sale) category. This won’t be needed under the proposed guidelines as the MTM provisions will not impact the banks’ P&L accounts.
“For AFS category, earlier, if there was an MTM gain, it was ignored. Any MTM loss was taken as a provision in P&L account. The new draft guidelines make the treatment of MTM gains and losses for AFS category symmetrical in the sense that whether it’s a gain or loss, it will both be credited through the reserve account, without taking through the P&L,” said Gambhir.
That said, some bankers are wary about holding all their investments till maturity as it reduces their ability to manage their credit exposures and risk.
“Banks will be very prudent to put anything in HTM because once it is done, the ability to risk management substantially reduces. You cannot sell from HTM. My sense is that when boards sit down and look at the constraints it imposes, they will see it’s a challenge to put a corporate bond in HTM. If you put a corporate bond in HTM, you can’t count it towards LCR (liquidity coverage ratio). There is no repo market for corporate bonds,” said Badri Nivas, country treasurer and head—markets and security services, Citibank, South Asia.
Banks are also seeking clarity on whether it will be mandatory for them to sell their investments in the fair value through profit and loss account (FVTPL) within 90 days, as is the case currently. FVTPL book can have investments such as securitization receipts, mutual funds, alternative investment funds, equity shares, derivatives (including those undertaken for hedging), among others, which do not have any contractually specified periodic cash flows and where solely payments of principal and interest on principal outstanding can be kept.
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