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RBI paper proposes new investment category for banks

Mumbai: The Reserve Bank of India has proposed a new investment category called Fair Value through Profit and Loss Account (FVTPL) for banks as part of its plan to align the regulations around the banks’ investment portfolio in line with the global accounting standards.

In a discussion paper released on Friday, RBI has proposed that the investment portfolio of banks shall now be divided into 3 categories – Held to Maturity (HTM), Available for Sale (AFS) and FVTPL.

The paper said that the existing Held For Trading (HFT) category will fall under the FVTPL category as per the proposed rules. HFT is a debt instrument that banks purchase with the intent for selling within a short period of time. Under FVTPL, debt instruments are measured at fair value through profit and loss account.

The new bank portfolio classification norms will come into effect from April 1, 2023, the RBI paper said, while inviting comments on a discussion paper in this regard from stakeholders by February 15.

Banks were expected to adopt Ind AS- the Indian version of global accounting standards – from 1 April 2018. But Reserve Bank of India (RBI) deferred its implementation several times after seeing the poor preparedness of banks to make the transition.

Ind Accounting Standard is on par with the International Financial Reporting Standard (IFRS) 9, under which banks are required to undertake early recognition of provision for losses on loans and off-balance sheet exposures based on an expected credit loss (ECL) model. Currently, Indian banks follow the Generally Accepted Accounting Principles (GAAP), which requires banks to recognise mark-to market losses.

In the discussion paper, RBI said that debt instruments with fixed or determinable payments and fixed maturity with the intent of holding till maturity shall now be classified under HTM (Held to Maturity). Corporate bonds have now been allowed to be held in HTM, which was not the case earlier. Bank investments in equity shares of subsidiaries, associates and joint ventures shall also be carried at cost under HTM, the paper said.

The paper has also recommended the removal of the ceiling on investment in HTM as a percentage to total investments and also the ceiling on SLR securities. Currently banks are allowed to invest beyond 25% of total investments under HTM, provided the investment in government securities for the purpose of meeting the Statutory Liquidity Ratio (SLR) requirement is capped at 18%.

Further the paper said that debt instruments which the bank intends to either hold till maturity or sell before maturity shall be eligible for Available for Sale (AFS), it said. Equity instruments shall be allowed to classify under AFS.

Securities held in HTM shall be carried at cost and shall not require marking to market after initial recognition with any discount or premium on the acquisition being amortised over the life of the instrument.

Securities held within the HFT sub-category shall be subject to daily MTM while other securities within FVTPL shall be marked to market at least on a quarterly, if not more frequent basis.

Investment Reserve Account (IRA) shall be discontinued and its balance shall be transferred to any reserve under “Revenue and Other Reserves” which is reckoned for CET 1, the paper said.

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