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Informist, Tuesday, May 12, 2026

 

By J. Navya Sruthi, Aaryan Khanna, and Cassandra Carvalho

 

MUMBAI/NEW DELHI – Banks are confused whether the new expected credit loss norms of the Reserve Bank of India require them to mark to market bonds held in their held-to-maturity books. This was the main point of discussion at a meeting Friday of bank treasuries hosted by the Fixed Income Money Market and Derivatives Association of India on the new norms, several bankers familiar with the discussion said.

 

The new norms were circulated by the RBI on Apr. 27 and take effect from the start of the next financial year. Though the RBI has given banks four years to transition fully to the new norms, bankers are worried because the hit to banks' balance sheets would be significant if they have to mark to market bonds in their held-to-maturity portfolios.

 

As per current guidelines, banks are not required to mark to market investments that are part of their held-to-maturity portfolios after an initial recognition of the fair value of such investments. The new norms are ambiguous whether these portfolios would be subject to mark-to-market, bankers said. If the portfolios have to be marked to market, several banks could see a significant erosion of their capital in a year when bond yields could be higher if the economy is in the middle of a rate hike cycle. This could impair their balance sheets, bankers said.

 

While the new expected credit loss norms are largely centred on advances by commercial banks, they also apply to their investments. Treasury officials, including several heads of treasury, had a wide-ranging discussion on the amendments to the directions on classification, valuation, and operation of commercial banks' investment portfolio that the RBI released Apr. 27, in line with the expected credit loss guidelines.

 

A reading of the amended guidelines shows that the new norms probably do not require bonds in banks' held-to-maturity portfolios to be marked to market. The confusion probably arises from two explanations that the amended guidelines include. As per the explanations, banks have to calculate the "fair value" of their bonds using a new concept called "effective interest rate", which will include the discounted cash flows from future estimated interest receipts on the bonds. The fair value of held-to-maturity securities as on Mar. 31, 2027, will be the new gross carrying amount for banks' portfolios for the transition to the expected credit loss norms and any change from the previous carrying amount would have to be adjusted to a bank's general reserve or revenue but not through its profit and loss account, according to the new norms. Bankers want clarity on some of these terms and definitions, how exactly these norms will work, and the resultant impact on valuations and capital.

 

In most cases, the addition of cash flows from future interest receipts, even discounted, is likely to lead to a gain in valuation, which is probably why the RBI has provided for the adjustment to be made to banks' reserves and not through their profit and loss accounts. However, there could be the odd case wherein application of the "effective interest rate" could cut a held-to-maturity bond's fair value, thereby resulting in a hit on the bank's reserves.

 

"A bank shall carry securities classified under HTM at cost and such securities shall not be marked to market (MTM) after initial recognition...," the current directions state. As per the amended guidelines, this paragraph has been modified to "a bank shall measure securities classified under HTM at amortised cost using the effective interest rate method and such securities shall not be marked to market (MTM) after initial recognition." This is probably the cause for the confusion as bankers are not sure how the "effective interest rate" will change the valuations of bonds.

 

"For government securities which are subject to SLR (statutory liquidity ratio), we are not clear if any MTM (mark to market) has to be taken into that account, whether HTM is subject to ECL (expected credit loss), because the bank is not going to dispose of anything (these government securities) and there is no credit risk in that," an official at a state-owned bank said. "All banks have a regulatory requirement to maintain SLR and everybody has some excess. The HTM book is huge for each bank, and why should it be subject to ECL?"

 

As per bankers' reading of the guidelines, banks must provide for unrealised losses on bonds issued by state governments that are part of their held-to-maturity portfolios at the end of the financial year. State-owned banks with large held-to-maturity portfolios were among those most worried about the impact of this norm and pitched at the FIMMDA meeting for a clarification or reversal by the regulator.

 

"Our understanding is that government securities of other jurisdictions--Japanese government bonds, UK gilts--those should be marked to market," an official at another state-owned bank aware of the discussion said. "But there should not be any MTM on government securities from within India, either from the Centre or states."

 

Another point of difference and discussion at the FIMMDA meeting related to the computation of the effective interest rate introduced by the RBI in the new guidelines. Though the RBI's final directions lay down in explicit terms the way to calculate the effective interest rate, the guidelines are not clear on the accounting for discounted instruments and some special securities, officials said.

 

"Effective interest rate is a new and confusing concept that can be accidentally misused or misaccounted for by banks," an official at a private-sector bank said. "Probably the easiest way to go about this would be to separate the capital gains aspect and the interest income."

 

Finally, bankers said the RBI's rigorous accounting requirement for the calculation of acquisition costs, such as brokerage or the fees paid to the Clearing Corp. of India Ltd., typically less than 0.01% of the value of the bond held in the portfolio, would require an overhaul of accounting across the portfolio. The valuation change would be minimal despite the overhaul, they said. Currently, banks write off these acquisition costs as operational costs without counting them as part of the bond's value.

 

Other operational points were also raised and discussed at the FIMMDA meeting, bankers said. Though the meeting lasted several hours, treasury officials said detailed discussions will continue for the next few weeks before FIMMDA gives a final list of comments and suggestions to the RBI.

 

"This was just a discussion, nothing has been decided yet," another participant from a private-sector bank said. "FIMMDA has asked everyone to meet again next week (this week) after reviewing their positions. I feel there will be a few more meetings before people find a consensus over all the issues."

 

Credit rating agencies, including Fitch Ratings, have said Indian lenders are well positioned for the transition to the expected credit loss regime, with banks' managements also saying the impact on their bottom lines would be limited. The RBI aims to put the accounting of its regulated banks on a par with International Financial Reporting Standard 9 norms.  End

 

Edited by Rajeev Pai

 

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