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The Reserve Bank of India’s (RBI’s) decision to include corporate bonds in the held-to-maturity (HTM) portfolio might deepen this market and make these securities more attractive for investors.
Securities acquired with the intention and objective of holding to maturity would be classified under the HTM category, and not be required to be marked to market (MTM), the regulator said.
“Banks collectively were so far not buying corporate bonds as the fear of MTM was a deterrent,” said Ajay Manglunia, managing director and head of Investment Grade Group at JM Financial. “The RBI guidelines, and corporate bonds becoming eligible for HTM classification will encourage banks to step up their deployment in this asset class as credit to top-notch companies has pricing issue. This is a good alternative to credit. We expect most banks with active treasury that couldn’t lend to companies due to pricing issues to be encouraged.”
On Tuesday, the RBI announced revised investment norms for scheduled commercial banks. From April 1, 2024, when these new norms take effect, banks will classify their entire investment portfolio (except investments in their own subsidiaries, joint ventures, and associates) under three categories – HTM, available for sale (AFS), and fair value through profit and loss (FVTPL).
“This is a good step that will help in the development of both secondary and primary markets in corporate bonds. There will be good demand in the corporate bond market,” said Arun Bansal, executive director and head of treasury, IDBI Bank. “And now there is no upper cap in HTM. Earlier, it was 23 per cent. So, it will help the corporate bond market.”
The investment classification principles aren't based on the criteria used for differentiating between the statutory liquidity ratio (SLR) and non-SLR securities, said RBI. “Accounting classification is based on the objective with which the security was acquired and the SPPI criterion. Therefore, SLR and non-SLR securities that meet solely payments of principal and interest (SPPI) criteria can be classified under HTM, AFS, or HFT, depending on the objective with which they were acquired.”
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Market participants believe that the spread between corporate and government bonds might narrow due to increased demand for the former.
According to RBI data, scheduled commercial banks invested around Rs 11 trillion in corporate bonds in 2022, of which Rs 7.6 trillion was invested by public-sector banks. “Corporate bond inclusion in the HTM category should help deepen the corporate bond market and squeeze the corporate bond spreads,” said Madhavi Arora, lead economist, Emkay Global.
However, investment in non-SLR with an original maturity of less than one year is not allowed.
“Banks shall not invest in non-SLR securities of original maturity of less than a year. Provided that this restriction shall not apply to investments in commercial paper, certificates of deposit and non-convertible debentures with original or initial maturity up to one year issued by companies (including non-banking financial companies) which are covered under RBI guidelines,” the RBI said.
