March 17, 2016 / 1:11 PM / 4 years ago

UPDATE 1-India eases rules for banks holding utilities debt - bankers

* India cbank eases rules for banks holding utilities debt

* Banks can count this debt in held-to-maturity category

* Rule will prevent banks from having to mark-to-market prices (Adds background, quote)

By Neha Dasgupta and Suvashree Choudhury

NEW DELHI/MUMBAI, March 17 (Reuters) - The Reserve Bank of India on Thursday provided relief to banks taking on debt from their state electricity providers as part of the country’s massive bailout of its utilities, according to three bankers who received a letter from the central bank.

The letter said the RBI would allow banks to include the debt they hold from state electricity utilities as part of their “held-to-maturity” (HTM) bonds, even if it pushes that category above an existing ceiling of 21.5 percent, the bankers said.

HTM refers to the portion of bond requirements lenders are allowed to hold until they mature without needing to mark-to-market them to daily price movements, thus letting banks avoid having to reflect potentially big losses in the illiquid bonds.

“It’s a good and positive step as it takes away the tension of marking them to market movements if we had to keep these bonds on our trading books,” said one senior trader who received the letter, declining to be identified because the communication had not been made public.

The central bank did not immediately reply to an email from Reuters seeking comment.

Indian Power Minister Piyush Goyal confirmed that the central bank has allowed lenders to hold the bonds under the HTM category.

To further assist banks, the RBI will also allow greater flexibility in selling the state utility debt by exempting the bonds from a rule that prevents lenders from selling more than 5 percent of their HTM debt once a year, the sources said.

Traders said this measure would enable banks to find buyers for large chunks of the state utility debt if they wish.

The RBI measures are intended to help the country achieve its massive bailout of state utilities under the UDAY power scheme the government announced last year, which pushes states to guarantee the debt held by regional electricity utilities.

India’s state utilities are reeling under debt of 4.3 trillion rupees ($64.42 billion), after years of undercharging customers for electricity as state governments sought to win votes.

Much of this debt is owed to banks, which have lent heavily to the utilities. The scheme allows lenders to convert up to 75 percent of existing loans to these electricity providers into bonds, with states assuming the interest payments and redemptions. ($1=66.7500 Indian rupees) (Editing by Rafael Nam and Clarence Fernandez)

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