The Indian central bank tightened rules on the valuation for government bonds, while easing nonperforming asset classification norms for micro, small and medium enterprises, or MSMEs.
The Reserve Bank of India said in a June 6 update that it is now requiring investors in state government bonds to value this debt at market prices instead of the fixed mark-up of 25 basis points above the yield of government securities. In case of nontraded state government securities, the valuation will be based on the state-specific weighted average spread over the yield of government securities.
The central bank will released detailed guidelines on the change by June 20.
The move was met with criticism by bond traders, who warned that it will drive up government and corporate bond yields even further, Reuters reported June 6. Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai, said the old government bond valuation rule allowed banks to hide their overall mark-to-market losses. With the new rule, banks will no longer buy these bonds, which in turn will push up yields. Vaidya expects India's benchmark 10-year bond yield to rise above 8% in the next few weeks.
In a move to offset some of the impact of the new bond valuation rule, the central bank allowed banks to spread overall bond trading losses for the current June quarter over the next four quarters.
Meanwhile, the RBI also temporarily allowed banks and nonbanking financial institutions to classify their exposure to all MSMEs with aggregate credit facilities above 250 million rupees as per the 180 day past due criterion, subject to certain conditions. The mandate is an extension of a similar rule extended to MSMEs registered under the goods and service tax regime in February, which gives them 180 days past the due date to repay their loans without being classified as nonperforming assets.
Eligible MSME accounts which were considered standard as of Aug. 31, 2017, will continue to be classified as standard if the payments due as of Sept. 1, 2017 and falling due up to Dec. 31 were or are paid not later than 180 days from their original due date, the regulator said.
As of June 6, US$1 was equivalent to 66.90 Indian rupees.
