The Reserve Bank of India (RBI) said on Wednesday it has extended the dispensation of an enhanced limit of the held-to-maturity (HTM) portfolio for government bonds till March 31 next year, enabling banks to better manage their investment portfolios. It permitted banks to include securities purchased between September 1, 2020 and March 31, 2024 in the increased limit for HTM portfolios. The central bank made the announcement in its statement on development and regulatory policies accompanying its monetary policy statement. “The HTM limits would be restored from 23 per cent to 19.5 per cent in a phased manner starting from the quarter ending June 30, 2024,” the RBI said. In April, 2022, the RBI had increased the limit for securities that can be placed in the HTM category to 23 per cent from 22 per cent earlier. At that time, the central bank had said that the HTM limit would be restored to 19.5 per cent of net demand and time liabilities–a proxy for deposits–in a phased manner from April-June of 2023. For banks, the enhanced HTM limit and the extension of the same provides a key cushion against prospective losses incurred on their bond portfolios. This is because the HTM portfolio is exempt from being marked-to-market. The two other bond portfolios that make up banks’ bond investment books are the available-for-sale (AFS) category and the held-for-trading (HFT) category. The AFS and the HFT categories are subject to marked-to-market losses, implying that if bond prices were to fall banks would have to make provisions for the losses on their holdings. The RBI has provided banks with an enhanced HTM limit—and therefore a greater buffer to protect against potential bond losses—since the coronavirus. The pandemic necessitated a surge in the government’s borrowing as it sought to increase spending on welfare schemes amid a sharp decline in its revenue streams. The larger government borrowing programme resulted in a much bigger supply of government bonds for banks, which are mandated to park a certain portion of their deposits in sovereign debt. With the RBI having embarked on a monetary tightening cycle since May, 2022, banks run increased risk of incurring losses on their bond holdings as yields rise tracking the central bank’s rate hikes. When bond yields rise, prices fall. So far in 2022, yield on the 10-year benchmark bond has climbed around 85 basis points to 7.30 per cent.
Published on : 2022-12-07 06:37:00
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