Some top banks are expected to skip tomorrow’s government bond auction, citing a problem with the Reserve Bank of India’s recent directive on trading in securities that are part of the held-to-maturity (HTM) portfolio.
“RBI needs to clarify some of the issues, since the circular seems to have been put out in a hurry,” said a senior executive at a leading public sector bank. The government intends to raise Rs 12,000 crore through the auction of three securities.
Banks can keep securities in the HTM category only up to 25 per cent of their net demand and time deposits. These securities remain in their portfolio till maturity, so banks do not have to follow mark-to-market accounting (revaluing assets to reflect current value) and make provisions if the value of the security changes.
When banks buy a government bond, they classify it into three categories — trading, available for sale (AFS) or HTM. If a security in the trading portfolio is not traded for 90 days, it has to be shifted to AFS. But the RBI expects banks to shift securities from AFS to HTM or vice versa at the start of the year and with prior permission of the bank’s board or the investment or asset-liability committees.
Last week, RBI had said if the sale value or transfer of securities in the HTM category exceeded five per cent of the book value at the beginning of the year, banks would need to disclose the market value of investments in that category. And, banks have been told to indicate the excess of book value over market value for which provision is not made. The details are to be disclosed in the annual financial statement.
Upsets calculations
A top-level executive of a public sector bank said the disclosure requirement can be a deterrent, since banks would have to disclose losses that had not been booked on the portfolio.
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Besides, several bankers said it was not clear if the circular was effective from April or from the date of issue. The Centre has completed almost half its budgeted borrowing of Rs 4,57,000 crore for the current financial year.
With the yield on 10-year benchmark 7.80 paper maturing in May 2020 at 7.83 per cent, banks may be encouraged to buy securities and classify these as HTM at a later date when yields go up.
Some banks skipped last week’s bond auction through which the government raised Rs 13,000 crore. An executive at one of the largest banks said the RBI circular restricted the banks’ ability to buy and classify a security. “Typically, the decision to keep a paper under the HTM, AFS or trading portfolio is based on an assessment of how liquid the paper would be. By putting restrictions, RBI is influencing our decision,” he said.
Another banker said the rules did not bar banks from selling a security from the HTM portfolio but only required them to transfer the gains to the reserves. “So, it was not being done to boost our bottom line.”
A top-level executive of a third public sector bank said banks used opportunities like the one offered in 2009, when yields fell to realign their portfolio and strengthen their balance sheet. In addition, he noted that given the illiquid nature of the government securities market, when only a handful of papers are tradable, banks often trade in long-tenure paper, say of 14 years, when they are 10 years from maturity. “If a paper suddenly turns liquid in an otherwise illiquid market, banks would obviously want to trade,” he said. For instance, at tomorrow’s auction, the government will raise Rs 3,000 crore through the auction of a paper due for maturity in 2027.
“We intend to skip the auctions till RBI provides clarity,” said a bank’s treasury executive.