Posted by: Uma Shashikant on Wed, Aug 18th, 2010
RBI Circular on HTM Categorisation
RBI recently issued a circular clarifying the treatment of transactions in government securities in the 'held to maturity'(HTM) category.
The Circular notes that banks are trading securities held in the HTM category and asks them to disclose any losses from such transactions if they exceed 5% of the book value. The Circular also asks banks to disclose that these losses have not been provided for. The Circular does not say 'losses' but alludes to providing for any excess of book value over market value, which refers to the market value being the lower number, thus creating an unrealised loss.
Banks are allowed to classify the securities in their investment portfolio into three categories - held to trade (those securities intended to be traded in the next 90 days) and held to maturity (those securities not intended for trading, but held until maturity) and available for sale (an intermediate category that is neither HTT nor HTM). Securities in HTM are classified as such, typically at the beginning of the year, and are not meant to be traded. No transfers from or to HTM is allowed during the year. Therefore "Sale of investments in the HTM Category" (the heading of the circular) is rather strange.
The RBI Circular raises the following questions:
a. As long as disclosures are made, is it fine to trade the HTM securities, without reclassifying them?
b. Since the Circular alludes to sale and transfers from HTM, of value over 5% of book value at the start of the year, will it apply to all transfers from HTM, including the once-a-year transfer to other categories?
Perhaps RBI will issue a clarification soon.