The RBI has issued revised guidelines for the classification, valuation, and operation of the investment portfolio of commercial banks based on feedback received on a discussion paper issued in January 2022.

The revised directions, effective April 2024, include principle-based classification of investment portfolios, tightening of regulations around transfers to/from the held-to-maturity (HTM) category and sales out of HTM, inclusion of non-SLR securities in HTM subject to certain conditions, and symmetric recognition of gains and losses.

“These 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,” the central bank said, adding that disclosures pertain to the fair value of investments in the HTM category, the fair value hierarchy, and sales out of HTM, among other issues.

Safeguards retained

While the norms align the accounting norms with global financial reporting standards, the RBI has retained important domestic prudential safeguards such as the investment fluctuation reserve (IFR), due diligence/limits for non-SLR investments, internal control systems, and reviews and reporting.

It said that there was a need to review and update the October 2000 norms, given the significant developments in the global standards on classification, measurement, and valuation of investments, the linkages with the capital adequacy framework, and progress in the domestic financial markets.

The revised framework has introduced a symmetric treatment of fair value gains and losses and a clearly identifiable trading book under Held for Trading (HFT). It has also removed the 90-day ceiling on the holding period under HFT and the ceilings on HTM.

Banks will be required to formulate a board-approved Investment Policy and classify their investment portfolio, except investments in their own subsidiaries, JVs, and associates, under three categories: HTM, Available for Sale (AFS), and Fair Value through Profit and Loss (FVTPL). The HFT segment will now be categorised as a sub-category within FVTPL.

Instruments that are compulsorily, optionally, or contingently convertible, those that have loss absorbency features such as additional tier 1 and tier 2 bonds, and preference and equity shares cannot be classified under HTM or AFS and will need to be classified as FVTPL.

The FVTPL category will also include investments in mutual funds, Alternative Investment Funds, Real Estate Investment Trusts, Infrastructure Investment Trusts, securitisation notes, which represent the equity tranche of a securitisation transaction, and bonds where the payment is linked to the movement in a particular index.

Investments in subsidiaries, associates, and JVs will need to be held at acquisition cost, and any discount or premium on the debt acquisition will be required to be amortised over the life of the instrument.

Banks will need to reclassify their investments from one category to another from the effective date and disclose such in the financial statements for FY24, the RBI said.