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RBI proposes new category for bank investments

The Reserve Bank of India has proposed a new funding category known as Fair Value by means of Profit and Loss Account (FVTPL) for banks as a part of a overhaul of classification, valuation and operations of banks’ funding portfolios. In a dialogue paper RBI stated banks’ held for buying and selling (HFT) portfolio will likely be housed throughout the nee FVTPL category.

Debt devices with fastened or determinable funds and glued maturity with the intent of holding until maturity shall be categorised underneath held to maturity (HTM). Non-SLR securities resembling company bonds will henceforth not be permitted to be held in HTM.

Bank investments in fairness shares of subsidiaries, associates and joint ventures shall even be carried at price underneath HTM.

RBI stated the dialogue paper proposes align the prudential framework with world requirements, whereas retaining some parts contemplating the home context.

“The ceiling on investments in HTM as a percentage to total investments as also the ceiling on SLR securities that can be held in HTM shall be dispensed with. However, the controls for sales out of HTM (barring certain existing exemptions) shall be tightened to ensure that the basic principles and tenets for classification of securities as HTM and valuing them at cost is not invalidated,” RBI stated.

Debt devices which the bank intends to both maintain until maturity or promote earlier than maturity shall be eligible for avialable for sale (AFS). Banks shall even have the irrevocable choice to classify fairness investments at preliminary recognition underneath AFS.

“FVTPL is the residual category i.e. all investments that do not qualify for inclusion in HTM or AFS shall be categorised as FVTPL. Illustratively, investments in Securitisation Receipts (SRs), mutual funds, alternate investment funds, equity shares (excluding certain exceptions), derivatives (including those undertaken for hedging), etc. which do not have any contractually specified periodic cash flows that are solely payments of principal and interest on principal outstanding (‘SPPI criterion’) shall be classified as FVTPL,” RBI stated.

The paper proposes that every one investments and derivatives be valued at honest worth on preliminary recognition. Where the acquisition price is just not the identical because the honest worth and the safety is just not quoted and can’t be priced utilizing market-based inputs, the loss, if any shall be instantly recognised whereas the positive factors shall be deferred.

The RBI has proposed that the revised framework with impact from April 1, 2023 with banks being allowed to make the transitional changes based mostly on the MTM place as at that date within the stability of ‘Reserves and Surplus’. Comments on the modifications have been requested until February 15.

Securities held in HTM shall be carried at price and never require marking to market after preliminary recognition. AFS securities however must be marked to market (MTM) a minimum of on a quarterly, if no more frequent foundation. Such MTM positive factors and losses shall be instantly credited/ debited to AFS-Reserve, with out routing by means of the revenue and loss account.

Securities held throughout the HFT sub-category shall be topic to day by day MTM whereas different securities inside FVTPL shall be marked to market a minimum of on a quarterly, if no more frequent foundation.

“In order to maintain the consistency of classification and measurement, reclassification between categories shall be prohibited. At the time of transition, banks shall be allowed a one-time option to re-classify their financial instruments and adjust the gains/losses on such reclassification in their reserves,” RBI stated.

Investment Reserve Account (IRA) shall be discontinued and its stability shall be transferred to any reserve underneath “Revenue and Other Reserves” which is reckoned for CET 1.

The central bank has instructed that The Institute of Chartered Accountants of India (ICAI) replace its steerage word on accounting for derivatives contracts for the presentation framework of banks.

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