Held-to-Maturity (HTM) Securities

Held-to-Maturity (HTM) securities are debt instruments that banks and financial institutions acquire with the explicit intention of holding them until their maturity date. In India, HTM securities occupy a central position in banks’ investment portfolios and play a crucial role in liquidity management, regulatory compliance, and financial stability. Their treatment has important implications for banking profitability, monetary policy transmission, and the broader Indian economy.

Concept and Meaning of Held-to-Maturity Securities

Held-to-Maturity securities are investments in debt instruments where the holder commits to retaining the security until maturity, thereby earning interest income and the redemption value rather than trading gains. These securities are not intended for short-term sale and are insulated from frequent market price fluctuations.
In the Indian banking system, HTM securities predominantly consist of government securities and other approved debt instruments. By classifying securities as HTM, banks signal their intention to prioritise stability and predictable returns over trading income.

Regulatory Framework and Classification

The classification and treatment of HTM securities are governed by guidelines issued by the Reserve Bank of India. Banks are required to classify their investment portfolios into three categories: Held-to-Maturity (HTM), Available-for-Sale (AFS), and Held-for-Trading (HFT).
HTM securities are subject to specific regulatory conditions:

• They must be held until maturity except under exceptional circumstances.
• Transfers out of the HTM category are restricted and subject to regulatory scrutiny.
• The proportion of securities that can be held under HTM is capped as a percentage of total demand and time liabilities.

These norms ensure disciplined use of the HTM category and prevent misuse to avoid market valuation.

Accounting and Valuation Treatment

A defining feature of HTM securities is their valuation treatment. Unlike trading or available-for-sale securities, HTM securities are not marked to market on a regular basis. They are carried at acquisition cost, subject to amortisation of premium or discount over the remaining maturity period.
This accounting treatment shields banks’ balance sheets from short-term market volatility arising from changes in interest rates. However, if there is a permanent diminution in value, provisioning is required to reflect the impairment.
The stability offered by this valuation approach is particularly important in periods of rising interest rates.

Role in the Banking System

HTM securities are a cornerstone of banks’ balance-sheet management in India. They are primarily used to meet Statutory Liquidity Ratio requirements, which mandate banks to hold a portion of their liabilities in liquid and safe assets.
By holding government securities in the HTM category, banks:

• Ensure predictable interest income.
• Avoid frequent mark-to-market losses.
• Strengthen balance-sheet stability.
• Manage long-term liquidity prudently.

Public sector banks, in particular, rely heavily on HTM portfolios to maintain earnings stability and capital adequacy.

Importance in Finance and Risk Management

From a financial risk management perspective, HTM securities reduce exposure to market risk, especially interest rate risk. Since these securities are intended to be held until maturity, temporary fluctuations in market prices do not directly affect reported profits.
This stability allows banks to focus on core lending activities without excessive concern over short-term valuation changes. However, concentration in long-duration HTM securities may still expose banks to reinvestment risk and opportunity costs if interest rates rise significantly.
Therefore, careful portfolio planning and duration management remain essential.

Interaction with Monetary Policy

HTM securities play an indirect but important role in the transmission of monetary policy. Changes in policy rates influence yields on newly issued government securities, affecting banks’ future investment decisions.
While existing HTM holdings are insulated from immediate valuation effects, banks’ appetite for new HTM investments responds to the interest rate environment. Over time, this influences banks’ income profiles and lending behaviour, shaping the broader credit conditions in the economy.

Contribution to the Indian Economy

At the macroeconomic level, HTM securities support financial stability by anchoring banks’ balance sheets during periods of volatility. Stable banks are better positioned to extend credit to productive sectors such as infrastructure, manufacturing, and services.
By facilitating smooth absorption of government borrowing, HTM portfolios also support public finance and fiscal management. A stable investor base for government securities helps contain borrowing costs and ensures orderly debt markets.
This stability is particularly important for an emerging economy like India, where banks are the primary financial intermediaries.

Advantages of Held-to-Maturity Securities

HTM securities offer several advantages:

• Predictable and stable income streams.
• Protection from short-term market volatility.
• Support for regulatory liquidity requirements.
• Enhanced balance-sheet stability for banks.