These revisions, set to take effect from April 2024, impact key aspects such as classification principles, tighter regulations on transfers, inclusion of non-SLR securities, and the symmetric treatment of gains and losses
In a move to enhance transparency and align with global financial reporting standards, the Reserve Bank of India (RBI) has introduced significant changes to the classification, valuation, and operation of commercial banks’ investment portfolios. These revisions, set to take effect from April 2024, impact key aspects such as classification principles, tighter regulations on transfers, inclusion of non-SLR securities, and the symmetric treatment of gains and losses. This explainer delves into the key modifications and their implications for the banking sector. In this explainer we look at the revised norms and how they will impact banks
What recent changes has the RBI introduced regarding commercial banks’ investment portfolios?
The RBI has issued revised guidelines for the classification, valuation, and operation of commercial banks’ investment portfolios, based on feedback received on a discussion paper issued in January 2022.
What are the key changes introduced by these revised guidelines?
The guidelines introduce a principle-based classification of investment portfolios, aligning them with global financial reporting standards. There are tighter regulations around transfers to/from the held-to-maturity (HTM) category and sales out of HTM. Non-SLR (Statutory Liquidity Ratio) securities can be included in HTM under certain conditions. The framework introduces symmetric treatment of fair value gains and losses.
What are the objectives of these changes according to the RBI?
The RBI aims to achieve several objectives with these changes including enhancing the quality of banks’ financial reporting, improving disclosures related to investments, supporting the corporate bond market. facilitating the use of derivatives for hedging and strengthening the overall risk management framework of banks.
Are there any domestic prudential safeguards retained by the RBI?
Yes, the RBI has retained important domestic prudential safeguards, including the investment fluctuation reserve (IFR), due diligence/limits for non-SLR investments, internal control systems, and reviews and reporting.
How will banks be required to classify their investment portfolio under these guidelines?
Banks will need to formulate a board-approved Investment Policy and classify their investment portfolio into three categories: Held to Maturity (HTM), Available for Sale (AFS), and Fair Value through Profit and Loss (FVTPL). The Held for Trading (HFT) segment will be categorized as a sub-category within FVTPL.
What types of instruments cannot be classified under HTM or AFS categories?
Instruments that are compulsorily, optionally, or contingently convertible, those with loss absorbency features such as additional tier 1 and tier 2 bonds, preference and equity shares cannot be classified under HTM or AFS. They will need to be classified as FVTPL.
Are there any specific instruments included in the FVTPL category?
The FVTPL category will include investments in mutual funds, Alternative Investment Funds, Real Estate Investment Trusts, Infrastructure Investment Trusts, securitization notes representing the equity tranche of a securitization transaction, and bonds linked to the movement in a particular index.
What is the treatment for investments in subsidiaries, associates, and JVs under these guidelines?
Investments in subsidiaries, associates, and joint ventures (JVs) will need to be held at acquisition cost, and any discount or premium on the debt acquisition will be required to be amortized over the life of the instrument.
Is there a requirement for banks to reclassify their investments under these guidelines?
Yes, banks will need to reclassify their investments from one category to another from the effective date of these guidelines and disclose such reclassification in their financial statements for FY24. These changes are expected to bring greater transparency and alignment with international standards in the classification and valuation of investment portfolios held by commercial banks in India.
