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Classification, Valuation and Operation of Investment Portfolio of Banks

Reserve Bank of India (RBI) has issued revised framework on classification, valuation and operation of investment portfolio of banks.

What is the basis of revised framework?

The extant regulatory instructions on classification and valuation of investment portfolio by commercial banks are largely based on a framework introduced in October 2000. A need was felt to review and update these norms. 

Accordingly, a discussion paper on ‘Prudential Norms for Classification, Valuation and Operations of Investment Portfolio of Commercial Banks’ was issued for public comments on January 14, 2022. Based on the inputs received, the revised regulatory framework for the investment portfolio has been issued.

What are the major changes under the revised framework?

The revised framework –

  • Introduces a symmetric treatment of fair value gains and losses.
  • Introduces a clearly identifiable trading book under Held for Trading (HFT).
  • Removes the 90-day ceiling on holding period under HFT.
  • Removes ceilings on Held to Maturity (HTM).
  • Requires more detailed disclosures on the investment portfolio. 

From when are the revised framework applicable?

The revised framework are applicable from April 01, 2024.

Which banks are covered under the revised framework?

The revised framework shall be applicable to all Commercial Banks [including Foreign Banks operating in India, Local Area Banks (LABs), Small Finance Banks (SFBs), Payments Banks (PBs)] excluding Regional Rural Banks.

What is the categorization of investments under the revised framework?

Banks shall classify their entire investment portfolio (except investments in their own subsidiaries, joint ventures and associates) under 3 categories –

  • Held to Maturity (HTM)
  • Available for Sale (AFS) 
  • Fair Value through Profit and Loss (FVTPL)

Held for Trading (HFT) shall be a separate investment sub-category within FVTPL. 

The category of the investment shall be decided by the bank before or at the time of acquisition.

Which securities shall be classified under HTM category?

Securities that fulfil the following conditions shall be classified under HTM –

  • The security is acquired with the intention and objective of holding it to maturity, i.e., the financial assets are held with an objective to collect the contractual cash flows; and
  • The contractual terms of the security give rise to cash flows that are solely payments of principal and interest on principal outstanding (‘SPPI criterion’) on specified dates.

Which securities shall be classified under AFS category?

Securities that meet the following conditions shall be classified under AFS –

  • The security is acquired with an objective that is achieved by both collecting contractual cash flows and selling securities; and
  • The contractual terms of the security meet the ‘SPPI criterion’.

Which securities shall be classified under FVTPL category?

Securities that do not qualify for inclusion in HTM or AFS shall be classified under FVTPL.

How shall investments be valued?

Initial recognition

  • All investments shall be measured at fair value on initial recognition. Unless facts and circumstances suggest that the fair value is materially different from the acquisition cost, it shall be presumed that the acquisition cost is the fair value.

Subsequent Measurement

  • Securities held in HTM shall be carried at cost and shall not be marked to market (MTM). 
  • The securities held in AFS shall be fair valued at least on a quarterly basis. The valuation gains and losses shall be directly credited or debited to a reserve named AFS-Reserve without routing through the Profit & Loss Account (P&L A/c).
  • Securities that are classified under the HFT sub-category within FVTPL shall be fair valued on a daily basis, whereas other securities in FVTPL shall be fair valued at least on a quarterly basis. The net gain or loss arising on such valuation shall be directly credited or debited to the P&L A/c.
  • All investments (i.e., including debt and equity) in subsidiaries, associates and joint ventures shall be held at acquisition cost. Banks shall evaluate such investments for impairment at least on a quarterly basis. Any diminution (devaluation) shall be recognised as an expense in the P&L A/c and may be subsequently reversed through P&L A/c, if there is a reversal of the diminution.
  • Any discount or premium on the acquisition of securities shall be amortised over the remaining life of the instrument.

What are the norms for reclassifications between categories?

  • After transition to revised framework, banks shall not reclassify investments between categories (viz. HTM, AFS and FVTPL) without the approval of their Board of Directors. 
  • Reclassification shall also require the prior approval of the Department of Supervision (DoS), Reserve Bank of India (RBI).
  • The reclassification should be applied prospectively from reclassification date.

What are the other norms for investment portfolios?

  • In any financial year, the value of investments sold out of HTM shall not exceed 5% of the opening value of the HTM portfolio. Any sale beyond this threshold shall require prior approval from DoS, RBI.
  • The amount of a bank’s investment in unlisted non-SLR securities shall not exceed 10% of the amount of its total investment in non-SLR securities as at the end of the previous financial year.
  • A limit of 5% of total transactions through brokers (both purchase and sales) entered into by a bank during a financial year shall be treated as the aggregate upper contract limit for each of the approved brokers. The limit of 5% shall not apply to banks dealings through Primary Dealers.

What are the reporting norms for investment portfolio?

  • A half-yearly review (as of March 31 and September 30) of the investment portfolio shall be undertaken by the banks which shall be placed before their Boards within 2 months, i.e., by end-May and end-November. A copy of the half yearly review reports shall be forwarded to the DoS, RBI by June 15th and December 15th respectively.
  • Banks shall furnish a ‘Statement of the Reconciliation of Bank's Investments’ as at the end of every accounting year. The statement shall be submitted to DoS, RBI, within one month from the close of the financial year.

What are the prudential norms for investment portfolio?

  • Banks shall recognize income on accrual basis for the following investments –
    • Government Securities, bonds and debentures of corporate bodies, where interest rates on these securities are predetermined and provided interest is serviced regularly and is not in arrears.
    • Shares of corporate bodies provided dividend has been declared by the corporate body in its Annual General Meeting and the owner's right to receive payment is established.
  • Income from units of mutual funds, alternative investment funds and other such pooled / collective investment funds shall be recognized on cash basis.
  • The criterion used to classify an asset as Non-Performing Asset (NPA) as per the Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances shall be used to classify an investment as a Non-Performing Investment (NPI). 
  • NPI shall only be upgraded to standard when it meets the criteria specified in the IRACP norms.
  • The provision to be held on an NPI shall be the higher of the following amounts –
    • The amount of provision required as per IRACP norms computed on the value of the investment immediately before it was classified as NPI; and
    • The depreciation on the investment with reference to its value on the date of classification as NPI.

What is Investment Fluctuation Reserve (IFR)?

Banks shall create an Investment Fluctuation Reserve (IFR) until the amount of IFR is at least 2% of the AFS and FVTPL (including HFT) portfolio, on a continuing basis, by transferring to the IFR an amount at least the lower of the following –

  • Net profit on sale of investments during the year.
  • Net profit for the year, less mandatory appropriations.

IFR shall be eligible for inclusion in Tier II capital. 

Banks shall be permitted to draw down the balance available in IFR in excess of 2% of its AFS and FVTPL (including HFT) portfolio, for credit to the profit / loss balance as disclosed in the P&L A/c at the end of any accounting year.


References

Reserve Bank of India. (2023, September 12). 'Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12534&Mode=0

Reserve Bank of India. (2025, April 01). 'Reserve Bank of India (Classification, Valuation and Operation of the Investment Portfolio of Commercial Banks) Directions, 2023'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12817&Mode=0


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