Banks may face hit on Q1 treasury gains as RBI discontinues shifting investments from HTM

Treasury Income

The treasury income of banks is likely to be impacted in the first quarter of the next financial year as the Reserve Bank of India (RBI) has discontinued one time shifting of securities from Held-to-maturity (HTM) to Available-for-sale (AFS) once a year, treasury heads of banks said.

The norms allowing the transfer of securities from HTM to AFS once a year helped banks increase their treasury income in the first quarter of every year, but the revised norms will now hit their gains, experts said.

The central bank has made these changes in the revised circular on the classification and valuation on investment, which will be effective from April 1, 2024.

“The one time shifting rule at the beginning of the year will be used infrequently post the new guidelines. Due to this Q1 trading income and consequent other income for entire banking will reduce,” said Anshul Chandak, Head Treasury - RBL Bank.

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According to the previous norms, banks shall have the freedom to shift investments to/from HTM with the approval of the Board of Directors once a year.

“Investments in unquoted units/shares/bonds of Category I and II AIFs kept in HTM and which have completed three years under HTM category shall be shifted at the beginning of the next accounting year in one lot to coincide with the annual transfer of investments from HTM category,” according to the previous norms.

However, the current revised norms do not mention this.

HTM securities are debt securities held by the bank until the debt matures. These securities are not mark-to-market (MTM) ones and banks do not have to provide for loss or profit.

AFS securities are those debt or equity securities investments by the company that are expected to sell in the short run and therefore will not be held to maturity.

According to Madhavi Arora, Lead Economist, Emkay Global Financial Services, this should be slightly negative for public sector banks, heavily dependent on treasury gains.

Current trend in treasury book

Some banks have increased their investments in securities that fall under Statutory Liquidity Ratio (SLR) and non-SLR categories and also registered treasury gains in the first quarter of the financial year 2024.

For instance, Union Bank of India increased its investment by 1.85 percent to Rs 3.49 lakh crore in the April-June quarter of FY24, and IDBI Bank’s treasury investment rose 22.4 percent on-year to Rs 1.08 lakh crore.

Similarly, Canara Bank’s treasury investment rose 7.30 percent to Rs 3.36 lakh crore.

According to the June quarter, domestic investment of State Bank of India (SBI) stood at Rs 15.24 lakh crore, of which Rs 12.39 lakh crore is in SLR securities.

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Demand for bonds

Treasury heads further said that the removal of the cap or limit on the HTM securities is likely to benefit the bond market and the demand will shift from the long-term bonds to short-term ones.

“Since the HTM limit, as percent of Net Demand and Time Liability (NDTL), has been removed, this incentivises nationalised banks on more investing bias towards 3-7 years of government securities and state development loans in the current cycle,” Arora said.

The RBI in the revised framework updates the regulatory guidelines with global standards and best practices while introducing a symmetric treatment of fair value gains and losses, a clearly identifiable trading book under Held for Trading (HFT), removing the 90-day ceiling on holding period under HFT, removal of ceilings on HTM and more detailed disclosures on the investment portfolio.

“Having no cap in HTM and no Mark-to-Market (MTM) slightly higher maturity good yield papers will be in demand that will enhance yield in investments,” said Arun Bansal, Executive Director Head of Treasury, IDBI Bank.

In the last few months, the yield on the government securities remained largely rangebound except on certain days when it shot up due to some domestic factors.

The 10-year bond yield was trading at around 7.2731 percent at 11:40 am on September 18, as per CCIL data.