A Summary of Guidelines on Categorisation
And Valuation of Banks' Investments
The categorisation of the banks' investment portfolio both in the SLR and non-SLR segments will be as per details given below. The proposed guidelines will be made effective from the half-year ended September 30, 2000.
A. Categorisation :
1) The entire investment portfolio of the banks (including SLR securities and non-SLR securities) will be classified under three categories, viz., `Held to Maturity', `Available for Sale' and `Held for Trading'. Under each category the six-fold classification, if applicable, will continue as hitherto. Consequently, in the balance sheet, the investments will continue to be disclosed as per the existing six classifications (a) Government Securities, (b) Other approved securities, (c) Shares, (d) Debentures and Bonds, (e) Subsidiaries and Joint Ventures and (f) Others.
[Definitions : The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity. The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading. The securities which do not fall within the above two categories will be classified under Available for Sale]
2) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
Held to Maturity
3) The investments classified under "Held to Maturity" will include the following :
Investment in subsidiaries and joint ventures.
Investments in debentures, which are deemed to be in the nature of an advance.
Any other investment that the bank may decide to include in this category. Such investments will not exceed 25 per cent of the total investments, which will exclude the investments specified at (i), (ii) and (iii) above.
4) The banks, which had already marked to market more than 75 per cent of their SLR portfolio, will be given the option to re-classify their investments under this category up to the permissible level.
5) Profit on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter be appropriated to the `Capital Reserve Account'. Loss on sale will be recognised in the Profit & Loss Account.
Available for Sale & Held for Trading
6) The banks will have the freedom to decide on the extent of holdings under Available for Sale and Held for Trading categories. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills and capital position.
7) The investments classified under Held for Trading category are to be sold within 90 days. If the bank is not able to sell the security within 90 days due to exceptional circumstances such as tight liquidity conditions, or extreme volatility, or market becoming unidirectional, the security should be shifted to the Available for Sale category.
8) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.
B. Shifting among categories :
9) Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year.
10) Banks may shift investments from Available for Sale category to Held for Trading category with the approval of their Board of Directors/ALCO/Investment Committee.
11) Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. However, it will be permitted only under exceptional circumstances as mentioned at item 7 above with the approval of the Board of Directors/ALCO/Investment Committee.
12) Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for.
C. Valuation :
13) Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity.
14) Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/joint ventures which are included under Held to Maturity category and provide therefor. Such diminution should be determined and provided for each investment individually.
15) The individual scrips in the Available for Sale category will be marked to market at the year-end or at more frequent intervals.
16) The individual scrips in the Held for Trading category will be revalued at monthly or at more frequent intervals.
17) The `market value' for the purpose of periodical valuation of investments included in the Available for Sale and the Held for Trading categories would be the market price of the scrip as available from the trades/quotes on the stock exchanges, price of SGL transactions, price list of RBI.
18) Reserve Bank of India will not announce the Yield to Maturity (YTM) rates for unquoted Government securities, as hitherto, for the purpose of valuation of investments by banks. The banks should value the unquoted SLR securities on the basis of the YTM rates to be put out by the Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association (FIMMDA) at quarterly intervals. The valuation of the other unquoted non-SLR securities, wherever linked to the YTM rates, will be with reference to the YTM rates as put out by the PDAI/FIMMDA.
The Statement on Mid-Term Review of Monetary and Credit Policy consists of three parts:
I. Mid-Term Review of Macro-economic and Monetary Developments in 2000-01;
II. Stance of Monetary Policy for the second half of 2000-01;
III. Financial Sector Reforms and Monetary Policy Measures.
Click here to read AnnexureI for:
Summary of Guidelines for Issue of
Commercial Paper (CP)
Click here to read AnnexureIII for:
Guidelines on Bank Financing of Equities and Investments in Shares