The HTM investment policy change will come into play as Four bankers said on Wednesday that the elimination of the limit on how much a bank can invest in securities they intend to retain till maturity by the Indian central bank will increase lenders’ desire for government securities and assist their bottom lines.
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As part of a larger adjustment to classification and valuation requirements, the Reserve Bank of India (RBI) removed the cap on investments in the held-to-maturity (HTM) class on Tuesday.
Bank’s Investment Portfolio
The bank’s investment portfolio is categorized into Held to Maturity (HTM), Held for Trading (HFT), and Available for Sale (AFS). AFS contains securities that are not included in HTM and HFT.
HTM includes investments that are purchased with the aim of being held until maturity. HFT includes securities that are purchased with the goal of being traded in order to profit from immediate price/interest rate fluctuations.
Moreover, Investments that fall under the HTM classification will be carried at the cost of acquisition without having to be tagged to market.
Recapitalization securities, investments in affiliates and joint ventures, and investments in debt instruments viewed as loans are a few of the investments that will be made.
Subject to the restriction that those investments will not exceed 25% of the total investment, omitting investments listed above, HTM will also include any other expenditure identified for consideration in this class.
The most popular investment type in the HTM class is typically bonds issued by governments. With some exceptions for securities purchased between September 1, 2020, and March 31, 2024, the current cap is 19.5% of a bank’s net deposit.
HTM Investment Policy Change
As the limit on the HTM portfolio is lowered and since there is some certainty on the future trajectory of interest rates, banks will be more likely to invest in three- to seven-year sovereign bonds and state debt instruments.
The RBI is anticipated to hold rates unchanged after a series of rate increases possibly into the middle part of 2024 before initiating to decrease rates.
Banks with significant HTM investments will then gain more at that stage.
Additionally, the new rules, which take effect on April 1, 2024, will increase mark-to-market (MTM) profits for institutions and lessen the uncertainty of their revenues, according to a note from Jefferies analysts.
The new standards stipulate that creditors with investments in the available-for-selling (AFS) class can move all appraisal gains or losses in this class to an AFS hold, escaping their profit and loss (P&L) declaration. While HTM securities are not required to be MTM, MTM bonds do have advantages for bankers with AFS assets.
According to Prakhar Sharma, an analyst at Jefferies, P&L (profit and loss) variability may decrease because MTM variations in AFS will be made through buffers.
Conclusion
In conclusion, the Reserve Bank of India’s decision to eliminate the investment cap on the held-to-maturity (HTM) category signifies a significant shift in the banking landscape.
This move is set to boost banks’ appetite for government securities, particularly three- to seven-year sovereign bonds and state debt instruments. However, as interest rate trajectories become clearer and rates stabilize, banks with substantial HTM investments stand to benefit the most.
Moreover, the new regulations, which will be effective from April 1, 2024, promise to enhance mark-to-market (MTM) profits for financial institutions while reducing revenue uncertainty.
On one hand, this strategic shift fortifies banks’ bottom lines, yet on the other, it also marks a pivotal moment in India’s financial sector, introducing a more stable and potentially lucrative investment landscape.
