Friday, May 27, 2022

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RBI proposes new norms for classification of banks’ investment portfolio

The Reserve Bank of India (RBI) proposed to allow banks to hold corporate bonds, or even equity shares of subsidiaries, associates and joint ventures, in the held-to-maturity category (HTM) of their investment books.

Investments in the HTM category are not required to be valued at the current market price, and hence, banks do not have to incur a mark-to-market loss if the market declines to the current prices of the instruments.

Earlier, only government and state government securities, and certain securities by infrastructure companies were allowed in the HTM category. Also, banks were not allowed to keep more than 25 per cent of their total investments in this category.

In a draft discussion paper on prudential norms on investment by banks, the RBI proposed removing the ceiling on investments in HTM as a percentage of total investments and also the ceiling on SLR securities that can be held there. Feedback on the draft can be given till February 15.

According to experts, this will allow banks to buy more bonds for both government and corporates, thereby increasing the investor base for these securities.

However, according to the draft discussion paper, “the controls for sale from HTM shall be tightened to ensure that the basic principles and tenets for the classification of securities as HTM and valuation of them at cost are not invalidated.”

The investment portfolio of banks will be classified into HTM, Available for Sale (AFS) and Fair Value through Profit and Loss Account (FVTPL). Within FVTPL, Held for Trading (HFT) will be a sub-category.

FVTPL will be the residual category where all investments that are not eligible to be included in HTM or AFS will be classified. This category may include investments such as securitization receipts (SRs), mutual funds, alternative investment funds, equity shares, derivatives (including those made for hedging) with no contractually specified periodic cash flows that are only payments of principal and interest on principal outstanding can be kept.

In either of these categories, while valuing assets initially, if the security cannot be assessed due to lack of market quotes, losses will have to be recognized immediately, while gains should be deferred.

Securities held in HTM will have to be carried at cost and will not require marking to market after initial recognition with any discount or premium on acquisition being amortized over the life of the instrument. However, these assets have to be assessed quarterly to account for any permanent diminution in value and the impairment, if any, must be debited to the Profit and Loss Account, the RBI said.

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