India’s central bank proposes to relax key investment class rules

Mumbai: India’s central bank has suggested changes to the valuation of bank investments, including relaxing rules on a key class of long-term investments that are immune to frequent valuation changes, but tightening those on the transfer of titles between classes.

A Reserve Bank of India (RBI) working paper released on Friday evening suggests removing caps on held-to-maturity (HTM) class of securities and allowing more types of instruments to be held in their bosom. However, banks will not be allowed to sell more than 5% of their investments in this category per year, with specified exceptions, under the proposed rules.

RBI has proposed to allow banks to keep corporate bonds, even shares of subsidiaries, associates and joint ventures in the held-to-maturity (HTM) category of their investment books.

An investment in the HTM category does not need to be valued at the current market price and therefore banks do not have to incur market price losses if the current prices of the instruments fall in the market.

Previously, only state and state securities and certain infrastructure company securities were allowed in the HTM category. In addition, banks were not allowed to keep more than 25 percent of their total investments in this category.

In a draft discussion paper on prudential standards on bank investments, the central bank proposed to remove the cap on investments in HTMs as a percentage of total investments as well as the cap on SLRs. [statutory liquidity requirement] securities that may be held there. Comments on the project can be given before February 15.

According to experts, this will allow banks to buy more bonds, both government and corporate, thereby increasing the investor base for these securities.

The discussion paper proposed that the proposed framework come into effect on April 1, 2023.

He also recommended that the local accounting watchdog update its current strict rules on the treatment of derivatives, which the central bank will then ask banks to follow. The paper notes that the current rules may have delayed the development of rates and credit derivatives markets.

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