As per the current report, the domestic corporate bond market by the view seems to have a high level of involvement in the commercial banks if the RBI Guidelines execute a scheme to categorize the corporate bonds as held-to-maturity (HTM) in the financing books of banks.
The Senior head bankers have mentioned the move from the central bank which helps to save other lenders from creating mandatory additional provisions for potential mark-to-market losses as per RBI guidelines. As per the new system, more investments can be kept by the banks, as they will have the freedom as per rule, also adding corporate bonds in the HTM category. Apart from that the profits from sales from HTM which are not to be considered also not permitted to be taken to profit and loss account. Otherwise, it will be considered and inspected by the department and directly taken to reserves. Also, it was known in addition, there was an impact and will have a limitation on sales from HTM. However, such type of changes will likely to have an impact on the banks’ in the reported P&L,” said Axis Bank, Neeraj Gambhir, group executive treasury, markets and wholesale banking products. Also, RBI has also suggested disconnecting the ceiling on investments in HTM as a percentage of total investments, and also the ceiling on holding Statutory Liquidity Ratio (SLR) securities. This type of change would likely make more lead on banks to purchase more corporate bonds, as in the sectors the government and corporate they both raise the investor base for such reliability.
The lenders and the bankers also have the opinion that the recent guidelines would like to generate the losses of amount reduced incurred on the trading book of banks. For instance, under the current guidelines, a rising interest rate scenario would have led to higher provisions because of the investments carried in the AFS (available-for-sale) category. As per the RBI Guideline, AFS category, in the past, if it was known that the gain in MTM then it was ignored at the place. Any MTM loss was taken as a provision in the P&L account. As per the new draft guidelines make the treatment of MTM losses or gain for the AFS category symmetrical in the sense that whether it’s a result of profit or loss, it will both be credited and certified result through the reserve account, without ensuring through the gain or loss.
It was said, bond market as some lenders are wary about holding possessions in all their investments till maturity as it eliminates their potentiality to direct their credit subjection and other risks.
As of now, the Banks are much judicious to add anything in HTM since as it’s done, it eliminates or reduces the actual capacity to risk management substantially. As we cannot sell through HTM. My sense is that when boards sit down and look at the constraints it imposes, they will see it’s a challenge to put a corporate bond in HTM. If you put a corporate bond in HTM, you can’t count it towards LCR (liquidity coverage ratio). There is no repo market for corporate bonds,” said Badri Nivas, South Asia, country treasurer and head markets and security services, Citibank.
The banks are also looking for lucidity on whether it will be required obligatory for them to sell their investments in the fair value through profit and loss account (FVTPL) within the period of 90 days, as of now in a case currently. FVTPL book can have investments such as mutual funds, securitization receipts, alternative investment funds, equity shares, derivatives, among others, as the corporate bond, which do not have any compulsorily any specified periodic flows of cash and where solely payments of principal and interest on the market level as per RBI Guideline the principal value can remain outstanding.