Sale of Investments held under Held to Maturity (HTM) category

Government Securities – Sale of Investments held under Held to Maturity (HTM) category

Reserve Bank of India, DBOD, has released two Notifications regarding the Sale of Investments held under Held to Maturity (HTM) category

The Notifications numbers are:

RBI/2010-11/153 DBOD. No. BP.BC. 34/21.04.141/2010-11 dt.August 6, 2010


RBI/2010-11/172 DBOD.FID.FIC.5/01.02.00/2010-11 dt. August 18, 2010

The relevant RBI Notifications can be accessed at


Government Securities are an important part of the Banks/FII’s Investment Portfolio.

Banks deal in Government Securities (popularly known as GSecs), primalry for two purposes

01) To meet their quota of SLR (Statutory Liquidity Ratio) commitments

02) To enhance their treasury income.

What are G-secs?

The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills issued by the Government of India.

Reserve Bank of India manages and services these securities through its public debt offices located in various places as an agent of the Government

These are borrowing instruments issued by the government through the Reserve Bank of India (RBI) for funding its fiscal deficit.

The RBI issues these securities via an auction mechanism through out the year on a calendar schedule.

G-secs are totally default risk-free. The government of India has no risk of default. If they don’t have the money, they can simply print it!

However, as they are risk free they also offer the lowest return, based on the simple risk-return principle.

Lower the risk associated with an instrument, lower will be the return.

Where are the G-Secs available?

Apart from purchasing government securities in the primary issuance, i.e. through auctions/sales, all types of government paper can also be purchased from the secondary market.

Primary Dealers also purchase and sell securities.

G-Secs are held by banks under three categories

01) Held to Maturity,
02) Available for Sale
03) Held for Trading

01) Mark to Market: (Available for Sale/Held for Trading) GSecs under this category are to be periodically marked to the Market rates, as per prevailing RBI guidelines. The Loss, if any, after such marking, is reflected in the Banks P&L account, for the respective financial year.

02) Held to Maturity: GSecs under this category ought to be held by the banks till they mature. Banks need not take any mark-to-market losses on such bonds.

As a standard policy matter, Banks have to set aside 25% of the net demand and time liabilities (NDTL – deposits and certain components of capital) of their total investments, which includes government securities as held-to-maturity portfolio.

According to RBI guidelines, all the profit gained from the sale of the government securities at the end of maturity will be classified as capital reserves and cannot be used for paying dividends

This is because; the Banks were exempted from the Mark to Market losses.

However, for efficient management of the GSecs, RBI’s allows Banks/Term Lending Institutions, churn their GSecs portfolio once a year; i.e moving GSecs from the MTM to HTM and vice-versa.

This shuffling can be done at any time, as per Banks strategy. The only condition is that in making the shift from MTM to HTM, the RBI guidelines prescribe valuations to be done at the prevailing market prices.

However, it was observed that Banks/Term Lending Institutions were frequently shuffling the Portfolio, to take advantage of the market situations.

This was commented in the Banks Annual Financial Inspection, by Reserve Bank of India.

To provide a fair level playing field for the Banks/Term Lending Institutions, RBI, DBOD department issued two Notifications.

One notification is aimed at Commercial Banks and the  other at All-India Term Lending and Refinancing Institutions (Exim Bank, NABARD, NHB and SIDBI).


The highlights in brief are:

a)     If the shuffling is in excess of the 5 percent of the book value of investments held in HTM category at the beginning of the year, Banks/FI’s should disclose the market value of the investments held in the HTM category, and indicate the excess of book value over market value for which provision is not made.

b)       This disclosure is required to be made in ‘Notes to Accounts’ in FIs’ audited Annual Financial Statements.

c)      The notification comes into force with immediate effect.

As the subject matter is a bit technical, I would not like to add many comments on this notification.

As there are another 6 months to go, for the Banks/FI’s Annual reports for FY 2010-2011, Banks have adequate time, to take any mid-way correction course.

I can only say that, the Banks/FI’s Annual reports from FY 2010-2011, will make for an interesting reading.

This will also aid the Analysts in drawing a correct picture of the Banks/FI performance.


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