Revised norms on classification of bank investments

MUMBAI, OCT. 21. The Reserve Bank of India has revised the guidelines on classification and valuation of investments by banks on the basis of recommendations of an informal group to bring them in consonance with international best practices.

The revised guidelines, which would be effective from the half- year ended September 30, 2000, require banks to classify their entire investment portfolio under three categories, namely, `held to maturity (HTM)', `available for sale (AFS)' and `held for trading (HFT)'.

In the balance sheet, investments would continue to be disclosed as per the existing six classifications, namely, (1) government securities (2) other approved securities (3) shares (4) debentures and bonds (5) subsidiaries/ joint ventures (6) others (commercial paper, mutual fund units, etc.). The investments under the AFS and HFT categories should be marked to market periodically at more frequent intervals.

The investments under the HTM category need not be marked to market as in the case of permanent securities at present.

Banks should formulate an investment policy with the approval of their board of directors to take care of the requirements of classification, shifting and valuation of investments, the RBI said in a statement.Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals, it said.

The investments included under HTM should not exceed 25 per cent of the banks total investments and they may include, at their discretion, under this category securities less than 25 per cent of total investment.

The banks, which had already marked to market more than 75 per cent of their statutory liquidity ratio (SLR) portfolio, will be given the option to re-classify their investments under held to maturity category up to the permissible level, the RBI appointed group said.

Profit on sale of investments in HTM category should be first taken to the profit and loss account and thereafter be appropriated to the capital reserve account. Loss on sale will be recognised in the profit and loss account. Banks will have the freedom to decide on the extent of holdings under available for sale (AFS) and held for trading (HFT) categories.

The investments classified under the HFT category would be those from which the bank expects to make a gain by from the movement in the interest rates market rates. Securities in the HFT category are to be sold within 90 days and if the bank is not able to sell the security within the stipulated period due to exceptional circumstances such as tight liquidity conditions, or extreme volatility, or market becoming unidirectional, the security should be shifted to the AFS category subject, it said.

Banks may shift investments to/from HTM category with the approval of the board of directors once a year, it said adding that such shifting would be allowed at the beginning of the accounting year and no further shifting to/from this category would be allowed during the remaining part of that accounting year.

Banks may shift investments from ASM to HFT category with with the approval of their board of directors/ asset liability committee/investment committee, it said.

Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for, the group said.

In respect of securities included in any of the three categories where interest/ principal is in arrears, the banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the value of the investment.

The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities. Banks should value the unquoted Central Government securities on the basis of the prices/ YTM rates put out by the Primary Dealers Association of India/fixed income money market and derivatives association, the group said adding, the treasury bills should be valued at carrying cost.

All debentures/ bonds other than debentures/ bonds which are in the nature of advance should be valued on the YTM basis. The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points above the rate applicable to a Government loan of equivalent maturity while the rate used for the YTM for unrated debentures/ bonds should not be less than the rate applicable to rated debentures/bonds of equivalent maturity. All debentures/ bonds other than debentures/ bonds which are in the nature of advance should be valued on the YTM basis. The preference share should not be valued above its redemption value. Equity shares for which current quotations are not available or where the shares are not quoted on the stock exchanges, should be valued at break-up value (without considering revaluation reserves, if any) which is to be ascertained from the company's latest balance sheet. In case the latest balance sheet is not available the shares are to be valued at Re. 1 per share.

Investment in quoted mutual fund units should be valued as per stock exchange quotations while those in non-quoted mutual fund units is to be valued on the basis of the latest repurchase price declared by the mutual fund in respect of each particular scheme.

In case of funds with a lock-in period, where repurchase price/ market quote is not available, units could be valued at net asset value. If NAV is not available, then these could be valued at cost, till the end of the lock-in period. Commercial paper and regional rural banks should be valued at the carrying cost.

- PTI

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