ICICI BANK FINED ~589 MN FOR SALE OF HTM BONDS
The Reserve Bank of India on Thursday slapped a ~589 million penalty on ICICI Bank for selling bonds from the lender’s held-to-maturity (HTM) category. HTM bonds are kept for redemption on maturity and are not for the purpose of trading. Therefore, these bonds do not attract mark-to-market losses, which is a practice of valuing bonds at their prevailing market rates and not at historical prices. “This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers,” the RBI said.
ICICI Bank was on Thursday slapped with a ~589-million penalty by the Reserve Bank of India (RBI) for selling bonds from the lender’s Held To Maturity (HTM) category.
Bonds in this category are meant for redemption at the end of maturity, not for trading. Therefore, these don’t attract ‘Mark-to-Market(MTM) losses, the accounting practice of valuing bonds at their prevailing market rates, not the historical prices.
There are other two portfolios in bonds — Available for Sales (AFS) and Held for trading (HFT) — that are traded and, therefore, liable for MTMlinked valuation. RBI allows banks to shift from one basket to the other once a year, typically at the beginning of a financial year.
The HTM category is maintained as a measure of a bank’s solvency. At least 20 per cent of a bank’s deposits must be held in this category of bonds.
Selling directly from HTM, therefore, is a violation of regulations.
“This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers,” RBI said.
ICCI Bank said that it had sold from HTM category over and above the permissible limit “due to a genuine misunderstanding.” It said it gave “utmost importance to regulatory compliance and ensuring compliance with all directives, guidelines and observations by RBI”.
ICICI Bank said a bank may sell from the HTM category but if the value of sales of securities from here exceeded five per cent of the HTM investments, they are required to disclose in the audited annual financial statement the market value of these HTM investments and the excess of book value over market value.
The bank “continued with the sales from HTM category for a few weeks during the quarter ended March 31, 2017, on the timing of the applicability of RBI’s direction in this matter”. The bank had disclosed in its annual report for FY17 that it sold more than five per cent of investments categorised as HTM. However, it had not made the specified additional disclosure at that time. The bank has subsequently been making the specified disclosure since the quarter ended June 30, 2017.
In the current financial year, ICICI Bank has sold less than five per cent of securities from its HTM portfolio, it stated.