In order to help banks better manage their investment portfolios, the Reserve Bank of India (RBI) said on Wednesday that it has extended the dispensation of an enhanced limit of the held-to-maturity (HTM) portfolio for government bonds till March 31 of next year.
It allowed banks to use the enhanced limit for HTM portfolios to cover assets acquired between September 1, 2020, and March 31, 2024.
The statement on the development and regulatory policies that accompanied its monetary policy statement from the central bank contained the news.
The HTM restrictions would be gradually restored from 23% to 19.5% beginning with the quarter ending June 30, 2024, the RBI stated.
The RBI raised the cap on securities that can be included in the HTM category from 22% to 23% in April 2022. The central bank had stated at the time that the HTM limit would be gradually decreased from April to June of 2023 to 19.5% of net demand and time liabilities, which serves as a stand-in for deposits.
The extended and improved HTM limits offer banks a critical safety net against potential losses on their bond portfolios. The HTM portfolio is exempt from being marked-to-market, which explains why.
The held-for-trading (HFT) category and the available-for-sale (AFS) category are the other two bond portfolios that makeup banks' bond investment books. Since the AFS and HFT categories are subject to marked-to-market losses, banks would be required to make provisions for the losses on their holdings if bond prices fell.
Since the coronavirus, the RBI has given banks a higher HTM limit, creating a larger safety net against prospective bond losses. Because of the pandemic, the government had to borrow more money than usual in order to fund welfare programmes and offset a substantial fall in its revenue sources.
Banks, which are required to park a specific percentage of their deposits in sovereign debt, now have a substantially greater supply of government bonds thanks to the larger government borrowing programme.
Since May 2022, when the RBI started its cycle of monetary tightening, banks are more at risk of suffering losses on their bond holdings as rates grow in response to rate hikes by the central bank. Bond prices decrease when yields increase.
The yield on the benchmark 10-year bond has increased by about 85 basis points to 7.30% so far in 2022.
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- HTM Bonds
- RBI
- Regulation
