Banks reported muted treasury gains in the April-June period of FY25 (Q1 FY25) following the Reserve Bank of India’s (RBI) revised norms on investment portfolios effective from April 1, 2024, despite the softening of government bond yields.
“Banks have reported muted treasury gains during Q1 FY25 despite the softening of yields across the curve. The main reason was the change in the investment valuation and classification guidelines by RBI. As per the new guidelines, incremental gains in the AFS portfolio have to be credited to the AFS Reserve, and in the case of the HFT (Held for Trading) portfolio, the securities are fair valued on a daily basis, with gains/losses being appropriated to the P&L account,” said VRC Reddy, head of treasury at Karur Vysya Bank.
Yield on the 10-year and 14-year government bonds fell by 5 basis points (bps) each, and the 30-year bond yield fell by 7 bps during the first quarter of FY25.
Reddy said banks were earlier allowed a one-time shifting of securities between the HTM (Held to Maturity) and AFS categories at the beginning of the financial year, which was an opportunity for the banks to monetise the gains through selling the securities in the market after shifting from HTM. “Post the implementation of new guidelines, banks are not allowed annual shifting of securities, thereby limiting the exponential profits. Further, in the new guidelines, HTM sale is restricted to 5 per cent of the HTM outstanding value at the beginning of the financial year,” he said.
As per the RBI’s revised norms, banks are allowed to categorise their entire bond investment portfolio into three classifications: Held-to-Maturity (HTM), Available-for-Sale (AFS), and Fair Value Through Profit and Loss (FVTPL). The new regulations integrate the existing sub-category of held-for-trading into the last category.
After transitioning to this framework, banks are not allowed to reclassify investments between categories (viz. HTM, AFS, and FVTPL) without the approval of the boards, as well as from the regulator. The norms mandated that securities that are classified under the HFT sub-category within FVTPL should be fair valued on a daily basis, whereas other securities in FVTPL will be fair valued at least on a quarterly, if not on a more frequent basis.
Under the new norm, banks must categorise bonds as HTM on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year.
Vijay Srivastava, chief financial officer (CFO) of Bank of Maharashtra, said, “Earlier, the banks used to shift high-yielding securities from HTM to AFS and sell them to the market, benefiting from the trading profit. And definitely, when you are selling your high-yielding securities, your yield on investment will come down. Now, because of the new guidelines, all the banks, including us, have not shifted. So this has protected our yields. Of course, you will see that the interest income from the treasury has increased, whereas the trading profit has come down.”
According to banking industry experts, the reclassification is likely to benefit the reserves of the banks and their net worth. “The decline in treasury income in Q1 FY25 can be attributed to the change in investment norms by RBI, which got applicable from April 1, 2025. The norms require passing of unbooked profits on the AFS portfolio to reserves instead of P&L,” said Sachin Sachdeva, vice president and sector head of financial sector ratings at ICRA.
“Given the softening of yields by end Q1 FY25, the mark-to-market gains on the AFS portfolio would have added to net worth directly instead of being passed via P&L,” Sachdeva added.
Reddy further said that the entire transition exercise is P&L neutral. “There is no benefit directly to P&L, whereas you have to debit or credit to reserves only. So it will impact only the capital adequacy and net worth of banks,” Reddy added.
First Published: Aug 05 2024 | 11:37 PM IST
