The Reserve Bank of India (RBI) has issued revised guidelines for the classification, valuation, and operation of commercial banks’ investment portfolios, with these changes set to take effect from April 2024. “These Directions are expected to enhance the quality of banks’ financial reporting, improve disclosures (disclosures of fair value of investments in HTM category, fair value hierarchy, sales out of HTM, etc.), provide a fillip to the corporate bond market, facilitate the use of derivatives for hedging, and strengthen the overall risk management framework of banks,” the RBI said in a release.New guidelines
Under the new guidelines, banks are required to formulate a board-approved Investment Policy and classify their investment portfolio into three categories: HTM, Available for Sale (AFS), and Fair Value through Profit and Loss (FVTPL). The HFT segment will now be a sub-category within FVTPL.
Instruments like compulsorily, optionally, or contingently convertible ones, those with loss absorbency features such as additional tier 1 and tier 2 bonds, preference shares, and equity shares cannot be classified under HTM or AFS and must be categorized as FVTPL.
The FVTPL category will also encompass 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 specific index movements.
Investments in subsidiaries, associates, and joint ventures must be held at acquisition cost, with any premium or discount on the debt acquisition amortized over the instrument’s life.
Banks will be required to reclassify their investments from one category to another starting from the effective date, with such changes disclosed in their financial statements for FY24, according to the RBI.
Key revisions
Key revisions include the introduction of principle-based classification of investment portfolios, stricter regulations surrounding transfers to and from the held-to-maturity (HTM) category, the inclusion of non-SLR (statutory liquidity ratio) securities in HTM under specific conditions, and the symmetric recognition of gains and losses.
These changes align accounting norms with global financial reporting standards while retaining important domestic prudential safeguards such as the investment fluctuation reserve (IFR), due diligence and limits for non-SLR investments, internal control systems, and reviews and reporting.
The revised framework introduces a symmetric treatment of fair value gains and losses and establishes a clearly identifiable trading book under the “Held for Trading” (HFT) category. It removes the previous 90-day ceiling on the holding period under HFT and the ceilings on HTM.
