Muted treasury gains for banks in Q1 FY25 due to new investment norms

Under the new norm, banks must categorise bonds as HTM on a permanent basis, with the exception of 5% of the portfolio that can be withdrawn throughout the year

Banks reported muted treasury gains during April-June of FY25 (Q1 FY25) following Reserve Bank of India’s (RBI’s) revised norms on investment portfolio effective from April 1, 2024, despite softening of government bond yields.

“Banks have reported muted treasury gains during Q1 of FY25 despite softening of yields across the curve. The main reason was change in the investment valuation and classification guidelines by the RBI. According to the new guidelines, incremental gains in available-for-sale (AFS) portfolio have to be credited to the AFS Reserve. In case of held for trading (HFT) portfolio, the securities are fair valued on daily basis and gains/losses are being appropriated to profit and loss (P&L) account,” said VRC Reddy, head of treasury at Karur Vysya Bank.

 

Yield on the 10-year and 14-year government bonds fell by 5 basis points (bps) each and 30-year bond yield fell by 7 bps during the first quarter of FY25.

Reddy said banks were earlier allowed one-time shifting of securities between the held to maturity (HTM) and AFS categories at the beginning of the financial year. This was an opportunity for the banks to monetise gains through selling the securities in the market after shifting from HTM.

“Post the implementation of new guidelines, banks are not allowed annual shifting of securities thereby limiting the exponential profits. Further, in the new guidelines, HTM sale is restricted to 5 per cent of HTM outstanding value at the beginning of the financial year,” he said.

According to the RBI’s revised norms, banks are allowed to categorise their entire bond investment portfolio into three classifications: HTM, AFS, and fair value through profit and loss (FVTPL). The new regulations integrate the existing sub-category of held-for-trading into the last category.

After transitioning to this framework, banks are not allowed to reclassify investments between categories (HTM, AFS, and FVTPL) without the approval of the boards, as well as the regulator.

The norms mandated that securities that are classified under the HFT sub-category within FVTPL should be fair valued on a daily basis. Other securities in FVTPL will be fair valued at least on a quarterly, if not on a more frequent basis.

Under the new norm, banks must categorise bonds as HTM on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year.

Vijay Srivastava, chief financial officer (CFO), Bank of Maharashtra, said, “Earlier, the banks used to shift the high-yielding security from HTM to AFS and sell to market and the trading property to the higher side. And, when you are selling your high-yielding security, your yield on investment will come down. Now because of new guidelines, all the banks, including us, have not shifted. So, this has protected our yields. Of course, you will see that the interest income from the treasury has increased, whereas the trading profit has come down.”

According to banking industry experts, the reclassification is likely to benefit the reserves of banks and their net worth.

“The decline in treasury income in Q1 FY25 can be attributed to change in the investment norms by RBI, which got applicable from April 1, 2025. The norms require passing of un-booked profits on AFS portfolio to reserves instead of P&L,” said Sachin Sachdeva, vice-president and sector head, financial sector ratings, ICRA.

“Given the softening of yields by end Q1 FY25, the mark-to-market gains on AFS portfolio would have added to net worth directly instead of being passed via P&L,” Sachdeva added.

Reddy further said that the entire transition exercise is P&L neutral. “There is no benefit directly to P&L, whereas you have to debit or credit to reserves only. So, it will impact only the capital adequacy and net worth of banks,” Reddy added.