Rules on banks’ investment portfolios to be revamped first time in 21 years
For the first time in 21 years, the Reserve Bank of India (RBI) will revise norms for investment portfolios of commercial banks to reflect changes in global standards on valuation and measurement, and progress in the domestic market.
This could pave the way for banks to transition to the new accounting standards (Ind-AS).
The outstanding investment portfolio of commercial banks was at Rs 45.84 trillion as of November 19 this year.
The investments are predominantly in government bonds.
The current norms are largely based on a framework introduced in October 2000, which drew upon the then prevailing global standards and best practices, the RBI said in a statement released along with the monetary policy review.
It would float a discussion paper on review of prudential norms.
Banks classify their entire investment portfolio under three heads — ‘held to maturity’ (HTM), ‘available for sale’ (AFS) and ‘held for trading’ (HFT).
Investments under the HTM category are capped at 25 per cent of the bank’s total investments.
Investments in statutory liquidity ratio securities are eligible for inclusion under the HTM category.
Anil Gupta, vice-president and sector head, financial sector ratings, ICRA, said currently banks hold a sizable portion of investments in the HTM category, which is not required to be marked to market.
Transitioning to Ind-AS may require banks to fairly value their HTM investments also.
Depending on the market position of the HTM books, banks could see an impact on profitability and capital.
The securities acquired with the intention to trade by taking advantage of the short-term price/interest rate movements are classified as ‘held for trading (HFT)’.
These investments are to be sold within 90 days.
The securities which do not fall under HTM or HFT categories are to be classified under the AFS category.
However, quoted equity shares / bonds/ units of venture capital funds; and equity, debentures and other financial instruments acquired through conversion of outstanding principal and / or interest amount should always be classified in the AFS category.
Banks have the freedom to decide on the extent of investment holdings under AFS and HFT.
This is done taking into account aspects like basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills and capital position.
As for shifting among categories, banks have the freedom to shift investments to/from HTM once a year. This needs approval from the board of directors of the bank.
The shifting is expected to be done at the beginning of the accounting year.
Photograph: Ajay Verma/Reuters
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