The Reserve Bank of India (RBI) on Tuesday revised the rules for classification, valuation and the operation of investment portfolios of commercial banks.
The revised “Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023” will be applicable from April 1, 2024, to all commercial banks excluding regional rural banks.
Banks will have to classify their entire investment portfolio under three categories — held to maturity (HTM), available for sale (AFS) and fair value through profit and loss (FVTPL).
HTM will comprise those debt instruments with fixed or determinable payments and fixed maturity which the bank wants to hold till maturity.
Non-SLR securities such as corporate bonds which satisfy this criteria can be held in HTM. Investments in the equity shares of subsidiaries, associates and joint ventures shall also be carried at cost under HTM.
AFS are those debt instruments which the bank intends to either hold till maturity or sell before maturity. FVTPL is the residual category — all investments that do not qualify for inclusion in HTM or AFS.
“Illustratively, investments in securitisation receipts (SRs), mutual funds, alternate investment funds, equity shares (excluding certain exceptions), derivatives (including those undertaken for hedging), which do not have any contractually specified periodic cash flows shall be classified as FVTPL,’’ an RBI discussion paper had said.
Banks are required to follow regulatory guidelines on the classification and valuation of investment portfolios, based on a framework issued in October 2000 drawing upon the then prevailing global standards and best practices.
RBI said that given the significant development in global financial reporting standards, the linkages with the capital adequacy framework as well as progress in the domestic financial markets, revised regulatory framework for the investment portfolio has been issued.
It added that its latest directions are expected to enhance the quality of banks’ financial reporting, improve disclosures, provide a fillip to the corporate bond market, facilitate the use of derivatives for hedging and strengthen the overall risk management framework of banks.
