“The notional loss in the HTM (held-to-maturity) book of scheduled commercial banks declined marginally to ₹70,497 crore as at end September 2023 as compared to a notional loss of ₹71,817 crore as at end March 2023,” the Reserve Bank of India said in its December 2023 Financial Stability Report.
RBI’s assessment of notional losses in the HTM portfolio – which it started publishing recently – assumes significance in light of the collapse of the Silicon Valley Bank and a few other US-based lenders in March 2023, stressed by huge losses incurred on holdings of American bonds.
“If you look at the core capital of public sector banks, in our estimate, that is close to around ₹8 lakh crore. So, ₹8 lakh crore of core capital vis-a-vis the ₹50,000 crore of unprovided losses on the HTM book means that the capital impact will be less than 10% of the reported capital,” said Anil Gupta, senior vice president, ICRA.
“It will be close to 6-7% of the reported capital adequacy. It’s not material unlike developed economies where in some cases the MTM (mark-to-market) losses exceeded the core capital of the banks,” said Gupta.
The HTM portfolio is not marked-to-market, implying that a rise in bond yields does not lead to banks incurring losses on securities held in this book. Rising bond yields cause a fall in bond prices and vice versa. In case of the other portfolios – the Available for Sale (AFS) and the Held for Trading (HFT) books, banks must set aside provisions for marked-to-market losses incurred on bond holdings.The RBI’s study of the notional losses in the HTM portfolio provides a picture of how banks’ books may be affected in case they were to sell those holdings. When the stress in the US banking sector occurred in March 2023, the government and the RBI took stock of the position of Indian banks’ HTM books to safeguard against potential risks.The impact on the bond portfolios of Indian banks was kept in check by the fact that local bond yields rose to a much smaller extent than US bond yields.