Banks may increase HTM holdings to reduce treasury book volatility

September 15, 2023

Banks are likely to increase their held-to-maturity (HTM) holdings to reduce volatility in their books of accounts, as the upper cap of 23 per cent on HTM holdings has been removed, according to the revised investment norms by the Reserve Bank of India (RBI), said market participants.

Moreover, the RBI has placed a limit on the sale of HTM assets, restricting it to a maximum of 5 per cent of their initial carrying value. While this 5 per cent sale from the HTM category is still permissible, internal reclassifications are now only allowed in extraordinary circumstances.

Importantly, the new norms have eliminated the 90-day ceiling on the holding period under held for trading (HFT), meaning banks are no longer required to sell securities within that period. This change allows banks to sell at more opportune times.

Madhavi Arora, lead economist at Emkay Global, said, “This change will be beneficial to banks as they can now book profits in the HFT portfolio when gains may be substantial, rather than time-bound selling.”

Previously, banks had the flexibility to sell 5 per cent of their HTM bonds throughout the year, and once a year, commercial banks were permitted to transfer their bonds designated as ‘held-to-maturity’ to their ‘available-for-sale’ (AFS) books. This one-time adjustment took place in early April and included government bonds and state government securities.