Easier bank gilt holding norms

Investment guidelines of banks changed to ward off impact of rising yields on govt bonds.

The Reserve Bank of India today stepped in to ward off the impact of rising yields on government bonds by changing the investment guidelines of banks.

The central bank relaxed the 25 per cent cap on banks' investments in the held-to-maturity category as a one-time measure in 2004-05.

An RBI press release said banks might exceed the present limit of 25 per cent of the total investment in the held-to-maturity category, provided the excess comprised only statutory liquidity ratio (SLR) securities.

The move is significant because the present norms state that 75 per cent of a bank's investments in the available-for-sale and held-for-trading categories are valued according to the current market rates of gilts every quarter before a bank finalises its financial statement. However, securities held in the held-to-maturity category are not marked-to-market.

By raising the held-to-maturity limit, the RBI is creating a situation where banks will not be required to mark-to-market a larger portion of their securities portfolio.

Most banks' SLR holding is above 40 per cent. To that extent, they will not be required to mark-to-market their investment portfolio, thereby escaping the adverse impact of recent interest rate movements.

The central bank also said the existing guidelines on classification of investments should be reviewed with a view to aligning them with international practices and the current state of risk management practices in India.

Between April and August (when the yield on the benchmark 10-year gilt touched 6.64 per cent), the yield rose by around 1.5 percentage points, eroding the value of the banking industry's gilt portfolio by over Rs 50,000 crore.

Since then, the yield on 10-year paper has dropped by over half a percentage point, cutting the losses substantially. With the RBI move, banks may not be required to provide for the drop in yield.

While giving the one-time concession, RBI has said the total SLR securities held in the held-to-maturity category should not more than 25 per cent of their demand and time liabilities (DTL) on the last Friday of the second preceding fortnight.

The release also clarified that shifting of such SLR securities to demand and time liabilities should be done at the acquisition cost/book value/market value on the date of transfer, whichever is less and the depreciation, if any, on such transfer should be fully provided for.

It stated that non-SLR securities held as part of demand and time liabilities might remain in that category, though no fresh non-SLR securities were permitted to be included in the demand-and-time liabilities category.