RBI likely to change disclosure norms for bonds.

If the RBI eases the rules, banks would get to shift more of state loans that are in HTM category to AFS, translating into an increase in liquidity as these bonds carry higher coupon.

The Reserve Bank of India (RBI) is likely to ease disclosure rules on the transfer of various categories of state government bonds held by high-street lenders, a move that could help increase treasury incomes at traditional banks.

The banking regulator may say that lenders need not disclose the transfer of state bonds from the held-to-maturity (HTM) category to the available-for-sale (AFS) segment, said a source with direct knowledge of the matter.

An email query sent to RBI remained unanswered until the publication of this report.

If the RBI eases the rules, banks would get to shift more of state loans that are in HTM category to AFS, translating into an increase in liquidity as these bonds carry higher coupon. This will also help financially prudent state governments buy back bonds as those states would aim to cut their borrowing costs in a falling rate regime.

“If banks are allowed to transfer state bonds from HTM (Held-to-Maturity) to AFS (Available for Sale) without any disclosure, it should increase the stock of such bonds available for secondary market trading,” said a senior executive from a large bond house.

The differential between state and central government bonds should continue to compress until fiscal year end before it expands in the new financial year on higher supply, the person said.

This makes a 'buy' case for investors for now. The differential was as high as 110 basis points three-four weeks ago, prompting investors to book mark-to-market profits with falling yields.

The easing of rules was discussed in a meeting held between the RBI and different state government secretaries a week ago.

State bonds, known as State Development Loans (SDL) in market parlance, are expected to inch up to Rs 4.3 lakh crore in FY20 from Rs 4 lakh crore in FY19, according to a note by PhillipCapital India. Net-net, supply is higher in FY2019-20.

Total outstanding stock of state bonds is more than Rs 23 lakh crore now.

State bonds offer 75-85 basis points higher than central debt securities. Bond yields and prices move in opposite directions.

State government bonds have of late assumed importance as such debt papers, now voluminous, can change market dynamics.

“SDL crowds out corporate borrowings in the bond market by increasing costs,” said B. P. Kanungo, RBI Deputy Governor, in a note in September last year. “A one percentage point increase in the ratio of state debt issuance to GDP (resulted) in an 11 percent decline in the volume (in Rupees) of corporate bonds issued in FY16.” (Source: The Economic Times)