Bonds: RBI orders banks to list bonds issued for capital at ‘fair value’
“It is clarified that investments in special securities received from the Government of India in preparation for the bank’s recapitalization requirement from the financial year 2021-22 will be recorded at fair value / market value on initial recognition in HTM, the central bank said in a notification Thursday.
The fair value/market value of these securities will be established based on the prices/YTM of central government securities of similar duration issued by Financial Benchmarks India Pvt. ltd. (FBIL).
Any difference between the acquisition cost and the fair value obtained as above will be immediately recognized in the profit and loss account, RBI said.
Mint Road has ordered five state banks, including the Bank of India, to list the “fair value” of zero-coupon government bonds, ET reported on Feb. 20. Since these bonds are typically offered at significant discounts to face value, such an order could force banks to raise more capital.
The regulatory guidance comes after an assessment showed that valuing these instruments at face value could create a misleading picture of banks’ financial strength and set a precedent that could be exploited in the future by others and weaken the banking system.
The Central Bank of India, Indian Overseas Bank, Uco Bank and Punjab & Sind Bank are expected to mark their Zero Coupon Recapitalization Bonds at fair value to meet standards set by Bank of Settlements Standards international markets for banks around the world, market sources said. AND.