Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021 (Updated as on December 8, 2022) - आरबीआय - Reserve Bank of India
Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021 (Updated as on December 8, 2022)
updated-as-on:
- 2022-12-08
- 2022-04-08
- 2022-03-31
- 2022-03-23
- 2021-08-25
RBI/DOR/2021-22/81 August 25, 2021 All Commercial Banks (excluding RRBs) Dear Sir / Madam, Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021 The Reserve Bank of India has, from time to time, issued several guidelines / instructions / directives to the banks on Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks. 2. To enable banks to have current instructions at one place, a Master Direction incorporating all the existing guidelines / instructions / directives on the subject has been prepared for reference of the banks. 3. This Direction has been issued by RBI in exercise of its powers conferred under Section 35A of the Banking Regulation Act 1949 and of all the powers enabling it in this behalf. Yours faithfully, (Usha Janakiraman) The guidelines have been repealed. Please refer to the Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2021. RBI/2021-22/ August 25, 2021 Reserve Bank of India - Classification, Valuation and Operation of Investment In exercise of the powers conferred under Section 35 A of the Banking Regulation Act, 1949 (hereinafter called the Act), the Reserve Bank of India (hereinafter called the Reserve Bank), being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified. 1. Short title and commencement
2. Applicability The provisions of these Directions shall apply to all Commercial Banks (excluding RRBs). These Directions shall be applicable to Small Finance Banks and Payments Banks as specified in Chapter X hereinafter. 3. Definitions (a) In these Directions, unless the context states otherwise, the terms herein shall bear the meanings assigned to them below: i. “Approved Securities” shall have the same meaning as defined in Section 5(a) of the Banking Regulation Act, 1949. ii. “Available for Sale” (AFS) means the category of investment portfolio of banks, which do not fall within the HTM or HFT category. iii. “Corporate bonds and debentures” for the purpose of these Directions mean debt securities which create or acknowledge indebtedness, including (i) debentures (ii) bonds (iii) commercial papers (iv) certificate of deposits and such other securities of a company, a multilateral financial institution (MFI) or a body corporate constituted by or under a Central Act or a State Act, whether constituting a charge on the assets of the company or body corporate or not, and includes convertible instruments and instruments of a perpetual nature, but does not include debt securities issued by Central Government or a State Government, or such other persons as may be specified by the Reserve Bank, security receipts and securitized debt instruments. iv. “Commercial Banks” for the purpose of these Directions shall mean all banking companies, corresponding new banks, and State Bank of India as defined under subsections (c), (da), and (nc) of section 5 of the Banking Regulation Act, 1949. v. “Current or Valid Rating” for the purpose of determining rated security means a credit rating granted by a credit rating agency in India, registered with SEBI and fulfilling the following conditions:
vi. “Derivative” shall have the same meaning as assigned to it in section 45U(a) of the RBI Act, 1934. vii. “Exchange” means “Recognized stock exchange” and shall have the same meaning as defined in Section 2 (f) of Securities Contracts (Regulation) Act, 1956. viii. “Government security” shall have the same meaning as assigned to it in Section 2(f) of the Government Securities Act, 2006. ix. “Held to Maturity” (HTM) means the category of investment portfolio maintained by the banks with intention to hold securities upto maturity. x. “Held for Trading” (HFT) means the category of investment portfolio maintained by the banks with intention to trade in securities by taking advantage of the short-term price/interest rate movements. xi. “Listed security” is a security which is listed on an exchange. xii. “Quoted Security” is a security for which market prices are available at stock exchanges / reporting platforms / trading platforms authorized by RBI / SEBI. xiii. “Rated Security” means a security which is subjected to a detailed credit rating exercise by a credit rating agency, which is registered with SEBI and shall carry current or valid credit rating. xiv. “Reconstitution” means the reverse process of stripping, where the individual STRIPS i.e., both coupon STRIPS and Principal STRIPS are reassembled to get back the original security, as defined in circular on Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS) issued vide IDMD.1762/2009-10 dated October 16, 2009, as amended from time to time. xv. “Repo” and “Reverse Repo” shall have the same meaning as defined in Section 45U of RBI Act, 1934. For the purpose of these Directions, the word ‘repo’ is used to mean both ‘repo’ and ‘reverse repo’ with the appropriate meaning applied contextually. xvi. “Securities” shall have the same meaning as defined in Section 2(h) of Securities Contracts (Regulation) Act, 1956. xvii. “Security Receipts” shall have the same meaning as defined in Section 2(1)(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. xviii. “Short Sale” shall have the same meaning as defined in Short Sale (Reserve Bank) Directions, 2018 issued vide FMRD.DIRD.06/CGM (TRS)-2018 dated July 25, 2018, as amended from time to time. xix. “Securitized debt instrument” means securities of the nature referred to in Section 2(h)(ie) of the Securities Contracts (Regulation) Act, 1956. xx. “Statutory Liquidity Ratio (SLR) Securities” shall have the same meaning as defined in Reserve Bank of India [Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)] Directions – 2021 issued vide DOR.No.RET.REC.32/12.01.001/2021-22 dated July 20, 2021, as amended from time to time. xxi. “STRIPS” (Separate Trading of Registered Interest and Principal of Securities) means distinct, separate securities that are created from the cash flows of a Government security and shall consist of (i) Coupon STRIPS, where the single cash flow of the STRIP represents a coupon flow of the original security; and (ii) Principal STRIP, where the single cash flow of the STRIP represents the principal cash flow of the original security, as defined in circular on Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS) issued vide IDMD.1762/2009-10 dated October 16, 2009, as amended from time to time. xxii. “Stripping” means the process of separating the cash flows associated with a regular Government security i.e., each outstanding semi-annual coupon payment and the final principal payment into separate securities, as defined in circular on Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS) issued vide IDMD.1762/2009-10 dated October 16, 2009, as amended from time to time. xxiii. “Unrated securities” means securities which do not have a current or valid rating by a credit rating agency registered with SEBI. xxiv. “When, as and if issued” (commonly known as ‘when-issued’ (WI)) security means a security as referred to in When Issued Transactions (Reserve Bank) Directions, 2018 issued vide FMRD.DIRD.04/CGM (TRS)-2018 dated July 24, 2018, as amended from time to time. b. All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934 and rules/regulations made thereunder, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be. CHAPTER – II 4. Investment Policy Framework (a) Banks shall undertake investment activities as per the terms and conditions specified in these Directions.
(b) Investment by offshore branches of Indian banks shall be in accordance with their Board approved policy on investments. Such policy shall, at the minimum, include risk perception associated with investments, minimum rating requirement, limits, approval process, host country regulations etc. (c) The investment policy shall be suitably framed to also include Primary Dealer (PD) activities. Provided that the PD business undertaken by the bank shall adhere to the instructions contained in Reserve Bank of India Master Direction - Operational Guidelines for Primary Dealers issued vide Master Direction IDMD.PDRD.01/03.64.00/2016-17 dated July 1, 2016, as amended from time to time. (d) The aforesaid instructions shall be applicable mutatis mutandis, to the subsidiaries and mutual funds established by banks except to the extent they are contrary to or inconsistent with specific regulations of the Reserve Bank, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) Pension Fund Regulatory and Development Authority (PFRDA) and International Financial Services Centres Authority (IFSCA), governing their operations. (e) These Directions shall be read with the Directions on Prudential Regulation for Banks’ Investments and Portfolio Management Services contained in the Master Direction- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016 issued vide DBR.FSD.No.101/24.01.041/2015-16 dated May 26, 2016, as amended from time to time. CHAPTER – III 5. Categorization of investments (i) Banks shall classify their entire investment portfolio (including SLR securities and non-SLR securities) under three categories, viz., ‘Held to Maturity’ (HTM), ‘Available for Sale’ (AFS) and ‘Held for Trading’ (HFT). Provided that the category of the investment, shall be decided by the bank at the time of acquisition and shall be recorded on the relevant investment document/proposal. (ii) Banks shall disclose the Investments in the Balance Sheet as set out in The Third Schedule to the Banking Regulation Act, 1949 (Form A, Schedule 8 - Investments) as under:
6. Held to Maturity (HTM) (i) Investments under HTM category shall not exceed 25 per cent of the bank’s total investments. (ii) Investments in following securities are eligible for inclusion under HTM category:
(iii) Investments as specified in sub-sections 6(ii)(c), 6(ii)(d) and 6(ii)(e) above, shall not be accounted for the purpose of ceiling of 25 percent specified under sub-section 6(i) of these Directions. (iv) Banks shall have the option to exceed the limit of 25 per cent of total investment under HTM category provided the excess comprises of: (a) SLR securities Provided that the total SLR securities held in the HTM category is not more than a fixed percentage of Net Demand and Time Liabilities (NDTL), as may be specified by the Reserve Bank from time to time, as on the last Friday of the second preceding fortnight which shall be prescribed by Reserve Bank of India from time to time. The current ceiling is 19.5 percent of NDTL. Provided that banks may exceed the ceiling upto an overall limit of 23 per cent of NDTL (instead of 19.5 per cent) till March 31, 2024, provided such excess is on account of SLR securities acquired between September 1, 2020 and March 31, 2024. Provided that the excess SLR securities acquired by banks during the period September 1, 2020 to March 31, 2024 shall be progressively reduced such that the total SLR securities held in the HTM category as a percentage of the NDTL do not exceed:
(b) investments made by banks under Targeted Long-term Repo Operations (TLTRO) as specified by the Reserve Bank of India. (v) Profit on sale of investments in this category shall be first taken to the Profit & Loss Account, and thereafter shall be appropriated to the ‘Capital Reserve Account’. The amount so appropriated shall be net of taxes and the amount required to be transferred to Statutory Reserves. Loss on sale shall be recognized in the Profit & Loss Account. 7. Available for Sale (AFS) & Held for Trading (HFT)
CHAPTER – IV 8. Shifting among categories (i) Banks shall, have the freedom to shift investments to/from HTM with the approval of the Board of Directors once a year. Provided that such shifting shall be done at the beginning of the accounting year. Provided further that additional shifting to/from HTM shall not be done during the remaining part of that accounting year unless explicitly permitted by RBI. Note: Banks shall have the option to shift the excess securities from the HTM category to available for sale (AFS) / held for trading (HFT) during the quarter in which the HTM ceiling is progressively brought down to the limits as indicated in sub-section 6 (iv)(a) of this Direction. (ii) Investments in unquoted units/shares/bonds of Category I and II AIFs kept in HTM and which have completed three years under HTM category shall be shifted at the beginning of the next accounting year in one lot to coincide with the annual transfer of investments from HTM category. (iii) Transfer of securities from AFS / HFT category to HTM category shall be made at the lower of book value or market value. Provided that where the market value is higher than the book value at the time of transfer, the appreciation shall be ignored, and the security shall be transferred at the book value. Provided further that in cases where the market value is lower than the book value, the provision for depreciation held against the security (including the additional provision, if any, required based on valuation done on the date of transfer) shall be adjusted to reduce the book value to the market value and the security shall be transferred at the market value. (iv) Transfer of securities from HTM to AFS / HFT category shall be subject to the following conditions:
Note: Regarding (a) above, banks shall not accrue the discount on the securities held under HTM category and such securities shall be held at acquisition cost till maturity. (v) Banks shall, have the freedom to shift investments from AFS to HFT with the approval of their Board of Directors/ ALCO (Asset Liability Committee) / Investment Committee. Provided that in case of exigencies, shifting can be done with the approval of the Chief Executive of the bank/Head of the ALCO but shall be ratified by the Board of Directors/ ALCO. (vi) Shifting of investments from HFT to AFS shall not be permitted. Provided that the above prohibition shall not apply in exceptional circumstances where the bank is not in a position to sell the security within 90 days due to tight liquidity conditions, or extreme volatility, or market becoming unidirectional. Provided further that such transfer shall be done only with the approval of the Board of Directors/ ALCO/Investment Committee. (vii) In the case of transfer of securities from AFS to HFT category or vice-versa, the securities need not be re-valued on the date of transfer and the provisions for the accumulated depreciation, if any, held shall be transferred to the provisions for depreciation against the HFT securities and vice-versa. (viii) In case of sales/transfers to/from HTM category, banks shall disclose in the ‘Notes to Accounts’ to the Financial Statements the market value of the investments held in the HTM category in cases where the value of sales and transfers of securities from/to HTM category exceeds 5 per cent of the book value of investments held in HTM category at the beginning of the year. Banks shall also disclose the excess of book value over market value for which provision is not made. (ix) The regulatory limit of 5 per cent prescribed in sub-section 8 (viii) shall not apply to shifting/sale of the following securities:
CHAPTER – V 9. Valuation (a) Held to Maturity (HTM) (i) Investments classified under HTM need not be marked to market (MTM). (ii) The investments shall be carried at acquisition cost provided that it is less than the face value of the security. (iii) If acquisition cost is more than face value, the premium arising out of difference between face value and acquisition cost shall be amortised over the period remaining to maturity.
(iv) Any diminution (other than temporary) in the value of the investments in subsidiaries / joint ventures, which are included under HTM, shall be recognised and provided individually for each investment. (v) The need to determine whether impairment has occurred is a continuous process and shall arise in the following circumstances: (a) On the happening of an event which suggests that impairment has occurred which, at the minimum, shall include:
(b) The company has incurred losses for a continuous period of three years and the net worth has consequently been reduced by 25 per cent or more. (c) In the case of a new company or a new project when the originally projected date of achieving the breakeven point has been extended i.e., the company or the project has not achieved break-even within the gestation period as originally envisaged. (vi) Banks shall obtain valuation of the investment from a reputed/qualified valuer and make provision for the impairment, if any, in case the need to determine whether impairment has occurred arises in respect of a subsidiary, joint venture or a material investment. (vii) Notwithstanding the provisions in sub-section 9(a)(ii) and 9(a)(iii) above, investments in special securities received from the Government of India towards bank’s recapitalisation requirement from FY 2021-22 onwards shall be recognised at fair value / market value on initial recognition in HTM. The fair value / market value of these securities shall be arrived on the basis of the prices / YTM of similar tenor Central Government securities put out by Financial Benchmarks India Pvt. Ltd. (FBIL). Any difference between the acquisition cost and fair value arrived as above shall be immediately recognized in the Profit and Loss Account. (b) Available for Sale (AFS)
(c) Held for Trading (HFT)
10. Market Value The market value for the purpose of periodical valuation of investments included in the AFS and HFT categories shall be as under: (a) Quoted securities The ‘market value’ for the quoted securities shall be the prices declared by the Financial Benchmarks India Pvt. Ltd. (FBIL) in accordance with RBI circular FMRD.DIRD.7/14.03.025/2017-18 dated March 31, 2018, as amended from time to time. For securities whose prices are not published by FBIL, market price of quoted security shall be as available from the trades/ quotes on the stock exchanges/ reporting platforms/trading platforms authorized by RBI/SEBI and prices declared by the Fixed Income Money Market and Derivatives Association of India (FIMMDA). (b) Unquoted SLR Securities (i) Central Government Securities
(ii) State Government Securities State Government securities shall be valued on the basis of the prices/ YTM rates put out by the Financial Benchmarks India Pvt. Ltd. (FBIL). (iii) ‘Other approved’ securities Other approved securities shall be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by FBIL. (c) Unquoted Non-SLR Securities (i) Debentures/ Bonds (a) All debentures / bonds shall be valued on the YTM basis. (b) Debentures / bonds shall be valued by applying the appropriate mark-up over the YTM rates for Central Government Securities as put out by FBIL/FIMMDA. (c) The mark-up applied shall be determined based on the ratings assigned to the debentures/ bonds by the credit rating agencies and shall be subject to the following:
(ii) Uday Bonds and Bonds issued by State Distribution Companies (Discoms) under Financial Restructuring Plan
(iii) Zero coupon bonds (ZCBs)
(iv) Preference Shares (a) The valuation of preference shares shall be done on YTM basis. (b) Preference shares shall be valued with appropriate mark-up over the YTM rates for Central Government Securities put out by the FBIL. (c) The mark-up shall be graded according to the ratings assigned to the preference shares by the rating agencies and shall be subject to the following:
(d) The preference share shall not be valued above its redemption value. (e) When a preference share has been traded on exchange within 15 days prior to the valuation date, the value shall not be higher than the price at which the share was traded. (f) Investments in preference shares as part of the project finance shall be valued at par for a period of two years after commencement of production or five years after subscription whichever is earlier. (v) Equity Shares
(vi) Mutual Funds Units (MF Units)
(vii) Commercial Paper Commercial paper shall be valued at the carrying cost. (viii) Investments in Regional Rural Banks (RRBs) Investment in RRBs shall be valued at carrying cost (i.e., book value) on a consistent basis. (ix) Investment in securities issued by Asset Reconstruction Companies (ARCs) (a) Investments in the Security Receipts (SRs) / Pass-Through Certificates (PTCs) issued by ARCs, in respect of the financial assets sold by banks to them, shall be recognised at the lower of:
(b) The above investment shall be carried in the books of the bank at the price as determined above until its sale or realisation, and on such sale or realisation, the loss or gain shall be dealt with as under:
(x) Investment in Category I and II Alternative Investment Funds (AIFs) (a) The quoted equity shares / bonds/ units of Category I and II AIFs in the bank's portfolio shall be marked to market preferably on a daily basis, but at least on a weekly basis. (b) Unquoted shares/bonds/units of Category I and II AIFs transferred from HTM to AFS category after completion of three years shall be valued as under:
(xi) Investment in equity/debt/ other financial instruments acquired by way of conversion of outstanding advances
(xii) Special Securities3 issued by Government of India The special securities, which are directly issued by Government of India and which do not carry SLR status shall be valued at a spread of 25 basis points above the corresponding yield on Government of India Securities. CHAPTER – VI 11. In addition to the conditions laid down in chapter II, III & IV of these Directions, banks shall adhere to the following instructions while transacting in Government Securities: (i) Transactions through SGL account Transactions in Government Securities shall be undertaken through SGL/CSGL account, under the Delivery Versus Payment System, in accordance with the guidelines issued by RBI from time to time. (ii) Short sale in Central Government dated Securities Banks shall undertake short sale transactions in Government securities provided it is in accordance with the requirements enumerated in Short Sale (Reserve Bank) Directions, 2018 issued vide FMRD.DIRD.05/14.03.007/2018-19 dated July 25, 2018, as amended from time to time. (iii) Government Securities on When Issued Basis Transaction undertaken on ‘When Issued’ basis in Government securities, shall be subject to the guidelines specified in the When Issued Transactions (Reserve Bank) Directions, 2018 issued vide FMRD.DIRD.03/14.03.007/2018-19 dated July 24, 2018, as amended from time to time. (iv) Value Free Transfer (VFT) of Government Securities Value free transfer in Government securities, shall be subject to the guidelines specified in IDMD.CDD.No.1241/11.02.001/2018-19 November 16, 2018, as amended from time to time (v) Separate Trading of Registered Interest and Principal Securities (STRIPS) Stripping / reconstitution of Government Securities shall be subject to the conditions laid down in guidelines IDMD.DOD.07/11.01.09/2009-10 dated March 25, 2010, as amended from time to time provided that accounting and valuation of such transactions shall be done as per instructions contained in Annex III. (vi) Repo in Government Securities Repo transactions (including reverse repo transactions) entered by the banks shall be subject to the guidelines specified in Directions FMRD.DIRD.01/14.03.038/2018-19 dated July 24, 2018, as amended from time to time. (vii) Retailing of Government Securities Banks shall, at their option, undertake retailing of Government Securities provided that:
(viii) Settlement of transactions in government securities
CHAPTER – VII 12. In addition to the conditions laid down in chapter II, III & IV of these Directions, banks shall adhere to the following instructions while investing in non-SLR securities4 in the primary as well as the secondary market: (i) Banks shall invest only in listed non-SLR debt securities of companies which comply with the requirements of the SEBI, except to the extent permitted in sub-section 12 (ii) as under. (ii) Investment in unlisted non-SLR securities a) Bank’s investment in unlisted non-SLR securities shall not exceed 10 percent of its total investment in non-SLR securities as on March 31 of the previous year. Provided that such investments shall comply with the disclosure requirements as prescribed by SEBI for listed companies. Provided further that investment in non-SLR securities (both primary and secondary market) where the security is proposed to be listed on the Exchange(s) shall be considered as investment in listed security at the time of making investment. Provided further that in case such security is not listed within the period specified between issuance and listing, the same shall be reckoned for the 10 per cent limit specified for unlisted non-SLR securities. Provided further that in case such investments included under unlisted non-SLR securities lead to a breach of 10 per cent limit, the bank shall not be allowed to make further investments in non-SLR securities (both primary and secondary market) as also in unrated bonds issued by companies engaged in infrastructure activities till such time bank’s investment in unlisted non-SLR securities comes within the limit of 10 per cent. (b) Banks, are permitted to make investment in unlisted non-SLR securities of additional 10 per cent over and above the limit of 10 per cent specified in (a) above Provided that such investment is in Securitisation papers issued for infrastructure projects, and bonds/debentures issued by Asset Reconstruction Companies (ARCs) registered with Reserve Bank of India. (c) Investment in units of mutual fund schemes having an exposure to unlisted securities of less than 10 per cent of the corpus of the fund, shall only be treated on par with listed securities for the purpose of compliance with the prudential limits prescribed above. Explanation: Exposure to the unlisted securities for compliance with the norm of less than 10 per cent of the corpus of the mutual fund scheme, shall not include Treasury Bills, Tri-Party Repo, Repo/ Reverse Repo and Bank Fixed Deposits in the numerator. (d) Investment in the following securities shall not be reckoned as ‘unlisted non-SLR securities’ for computing compliance with the prudential limits prescribed in these Directions:
(e) Banks shall compute the denominator i.e., 'total non-SLR investments', in the prudential cap stated above, by totaling investments classified under the following four categories in Schedule 8 to the balance sheet, viz., 'shares', 'bonds & debentures', 'subsidiaries/joint ventures' and 'others'. (iii) Banks shall not invest in non-SLR securities of original maturity of less than one-year. Provided that the above restriction shall not apply to investments in Commercial Paper and Certificates of Deposits and NCDs with original or initial maturity up to one year issued by corporates (including NBFCs), which are covered under RBI guidelines. (iv) Banks shall not invest in long-term Zero Coupon Bonds (ZCBs) issued by corporates (including those issued by NBFCs). Provided that the above prohibition shall not apply in cases where the issuer builds up a sinking fund for all accrued interest and keeps it invested in liquid investments/ securities such as Government bonds. (v) Banks shall not invest in Low Coupon Bonds which carry very low coupons that are not market related and are redeemed at maturity with substantial premium. Provided that the above prohibition shall not apply in cases where the issuer builds up a sinking fund to the extent of the difference in the accrued interest calculated on the basis of YTM applicable to the bond and the actual coupon payable on the bond and keeps it invested in liquid investments/ securities such as Government bonds. (vi) Banks shall not invest in unrated non-SLR securities. Provided that the banks shall have the option to invest in unrated bonds of companies engaged in infrastructure activities, within the ceiling of 10 per cent for unlisted non-SLR securities as referred in section 12(ii)(a) of these Directions. Note: This provision is not applicable on investments in securities referred in section 12(ii)(d) of these Directions (vii) The total investment by banks in liquid/short term debt schemes (by whatever name called) of mutual funds with weighted average maturity6 of portfolio of not more than 1 year, shall be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year. (viii) Repo in Corporate Bonds: Banks shall undertake repo in corporate bonds as per guidelines given in circular FMRD.DIRD.01/14.03.038/2018-19 dated July 24, 2018, as amended from time to time. (ix) OTC Transactions in Certificates of Deposit (CDs) and Commercial Papers (CPs) and Non-Convertible Debentures (original maturity up to one year):
(x) Investments in Long Term Bonds issued by banks for Financing of Infrastructure and Affordable Housing Investment by banks in the long-term bonds issued by other banks for financing of infrastructure and affordable housing, shall be subject to following conditions:
(xi) Trading and Settlement in Corporate Bonds and Securitised Debt Instruments
13. Other requirements (i) Banks shall undertake the due diligence in respect of investments in non-SLR securities. (ii) Banks shall ensure that credit facilities for activities/purposes precluded by RBI regulations are not financed by way of funds raised through the non-SLR securities. (iii) Except for unrated securities permitted in this Direction, banks shall make investment in the debt securities with a credit rating of not less than investment grade from a Credit Rating Agency registered with the SEBI. (iv) Disclosure requirements in offer documents
(v) Role of Boards (a) It shall be the responsibility of the Board to ensure proper risk management systems are in place for capturing and analyzing the risks in respect of non-SLR investment. (b) The Board shall review the following aspects of non-SLR investment at least at quarterly intervals:
CHAPTER – VIII 14. Internal Control System Banks shall establish a robust internal control mechanism in respect of investment transactions and shall, at a minimum, ensure the following:
15. Engagement of brokers In addition to the conditions laid down in Section 14 of these Directions, engagement of the services of the brokers shall be on the terms and conditions specified in the ensuing paragraphs: (i) Banks engaging services of brokers shall ensure that the role of the broker shall be restricted to that of bringing the two parties to the deal together. Note: The broker is not obliged to disclose the identity of the counterparty before the conclusion of the deal. (ii) The brokerage on the deal payable to the broker, if any (if the deal was put through with the help of a broker), shall be clearly indicated on the notes/ memorandum put up to the top management seeking approval for putting through the transaction. (iii) The bank shall also ensure that the broker note contains the exact time of the deal and the name of the counterparty. Their back-office shall ensure that the deal time on the broker note and the deal ticket is the same. The bank shall also ensure that their concurrent auditors audit this aspect. (iv) The brokers shall not have any role in the process of settlement of deals. The settlement of the deal shall take directly between the counterparties viz., both fund settlement and delivery of security. (v) Banks shall not transact in Government Securities in physical form with any broker. (vi) Banks shall not engage the services of any broker in transactions involving the Inter-bank securities. Provided that the above prohibition shall not apply to banks undertaking securities7 transactions among themselves or with non-bank clients8 through members of the National Stock Exchange (NSE), the Stock Exchange, Mumbai (BSE) and MCX Stock Exchange (MCX-SX). (vii) Banks shall, subject to approval of their top management, prepare a panel of approved brokers which shall be reviewed annually or more often if so warranted. The criteria for empanelment of brokers shall include, at the minimum, prior experience, creditworthiness, market reputation and details of regulatory action, if any. A record of broker-wise details of deals put through and brokerage paid, shall be maintained. (viii) Prudential Limits9 A limit of 5 percent of total transactions through brokers (both purchase and sales) entered into by a bank during a financial year under review shall be treated as the aggregate upper contract limit for each of the approved brokers. Provided that the limit shall be observed with reference to the year under review and the bank shall keep in view the expected turnover of the current year which shall be based on turnover of the previous year and anticipated rise or fall in the volume of business in the current year. Provided that direct deals with the brokers as purchasers or sellers and transactions conducted with brokers on behalf of the clients shall be included in the total transactions of the year to arrive at the limit of transactions to be done through an individual broker and shall exclude transactions entered into directly with counterparties i.e., where brokers are not involved, to arrive at total transactions. Provided further that if for any reason it becomes necessary to exceed the aggregate limit for any broker, banks shall record in writing the specific reasons for such breach and the Board shall be informed, post-facto. Provided further that the business put through any individual broker or brokers in excess of the limit, with the reasons for the same, shall be covered in the half-yearly review to the Board of Directors/Local Advisory Board. Provided further that the limit of 5 per cent shall not apply to banks dealings through PDs. (ix) These instructions shall mutatis-mutandis apply to subsidiaries and mutual funds of the banks. 16. Audit, review and reporting Banks shall ensure that there are adequate internal control and audit procedures in place in regard to the conduct of the investment portfolio. Banks shall adhere to the following instructions in regard to audit, review and reporting of investment transactions: (i) A half-yearly review (as of March 31 and September 30) of the investment portfolio shall be undertaken by the banks which shall be placed before their Boards within two months, i.e., by end-May and end-November. The review shall cover, at the minimum, operational aspects of investment portfolio, amendments made to the Investment Policy, major irregularities observed in all audit reports, position of compliance thereto and certify adherence to laid down internal investment policy and procedures and the Reserve Bank guidelines. (ii) A copy of the review report put up to the Bank's Board shall be forwarded to the Department of Supervision, RBI by June 15 and December 15 respectively. (iii) Treasury transactions shall be separately subjected to concurrent audit by internal auditors and the results of their audit shall be placed before the MD&CEO/Chief Executive Officer (CEO) of the bank once every month. (iv) The business done through brokers shall be audited by the same concurrent auditors who audit the treasury operations of the bank and the audit report shall be included in their monthly report to the MD&CEO/CEO of the bank. (v) The internal audit shall cover the transactions in securities on an ongoing basis, monitor compliance with the laid down management policies/prescribed procedures and report deficiencies directly to the management. (vi) The Audit Committee of the Board (ACB) shall review in every meeting the total fund based and non-fund based capital market exposure of bank, ensure that the guidelines issued by the Reserve Bank are complied with and adequate risk management and internal control systems are in place. With respect to investment in shares, the surveillance and monitoring shall be done by the ACB. (vii) The ACB shall keep the Board informed about the overall exposure to capital market, the compliance with the Reserve Bank and Board guidelines, adequacy of risk management and internal control systems. (viii) Banks shall institute a regular system of monitoring compliance with the prudential and other guidelines issued by the Reserve Bank. The banks shall get compliance in key areas certified by their statutory auditors and furnish such audit certificate to the Regional Office of Department of Supervision, RBI under whose jurisdiction the Head Office of the bank falls. (ix) Reconciliation of holdings of Government Securities – Audit Certificate
CHAPTER – IX 17. A. Income recognition (i) Banks shall recognize income on accrual basis for the following:
(ii) Income from units of mutual funds shall be recognized on cash basis. B. Accounting for Broken Period Interest Banks shall not capitalize the broken period interest paid to the seller as part of cost and treat it as an item of expenditure under Profit & Loss Account in respect of investments in government securities and approved securities10. 18. Investment Fluctuation Reserve & Investment Reserve Account (i) Investment Fluctuation Reserve (IFR) (a) Banks shall create an IFR11 until the amount of IFR is at least 2 per cent of the HFT and AFS portfolio, on a continuing basis, by transferring to the IFR an amount not less than the lower of the following:
(b) IFR shall be eligible for inclusion in Tier-II capital. Note: The cap applicable on recognition of General Provisions and Loss Reserves as Tier II capital is not applicable on IFR. (c) Bank shall, be permitted to draw down the balance available in IFR in excess of 2 percent of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year. (d) In the event the balance in the IFR is less than 2 percent of the HFT and AFS investment portfolio, a draw down shall be permitted subject to the following conditions:
(ii) Investment Reserve Account (IRA) (a) In the event, provisions created on account of depreciation in the ‘AFS’ or ‘HFT’ categories are found to be in excess of the required amount in any year, the excess shall be credited to the Profit & Loss Account and an equivalent amount (net of taxes, if any and net of transfer to Statutory Reserves as applicable to such excess provision) shall be appropriated to an IRA Account in Schedule 2 – “Reserves & Surplus” under the head “Revenue and Other Reserves”. (b) IRA shall be eligible for inclusion under Tier-II within the overall ceiling of 1.25 per cent of total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves. (c) The amount drawn down from the IRA shall not be available to a bank for payment of dividend among the shareholders. (d) The balance in the IRA transferred ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve, General Reserve or balance of Profit & Loss Account is eligible to be reckoned as Tier I capital. (e) Banks shall have the freedom to utilise IRA as follows: (i) The provisions required to be created on account of depreciation in the AFS and HFT categories shall be debited to the Profit & Loss Account and an equivalent amount (net of tax benefit, if any, and net of consequent reduction in the transfer to Statutory Reserve), shall be transferred from the IRA to the Profit & Loss Account12. (ii) The amounts debited to the Profit & Loss Account for provision shall be classified in Profit & Loss Account as per instructions given in Part A of Annexure II of Master Direction on Financial Statements - Presentation and Disclosures dated August 30, 2021, as amended from time to time. (iii) The amount transferred from the IRA to the Profit & Loss Account, shall be shown as ‘below the line’ item in the Profit and Loss Appropriation Account, after determining the profit for the year. (iv) Provision towards any erosion in the value of an asset is an item of charge on the profit and loss account, and hence shall appear in that account before arriving at the profit for the accounting period. (v) Adoption of the following shall not only be adoption of a wrong accounting principle but would, also result in a wrong statement of the profit for the accounting period and banks shall not make the following entries:
19. Non-Performing Investments (NPI) (i) Banks shall not reckon income on the securities and shall also make appropriate provisions for the depreciation in the value of the investment in respect of securities included in any of the three categories of investments where interest/ principal is in arrears. Banks shall not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities. (ii) The criterion used to classify an asset as Non-Performing Asset (NPA) shall be used to classify an investment as Non-Performing Investment (NPI) i.e., an NPI is one where interest/ installment (including maturity proceeds) is due and remains unpaid for more than 90 days. (iii) The above shall apply, mutatis mutandis to preference shares where the fixed dividend is not paid. If the dividend on preference shares (cumulative or non-cumulative) is not declared/paid in any year it shall be treated as due/unpaid in arrears and the date of balance sheet of the issuer for that particular year shall be reckoned as due date for the purpose of asset classification. (iv) In the case of equity shares, in the event the investment in the shares of any company is valued at Re.1 per company on account of the non-availability of the latest balance sheet in accordance with para 10(c)(v) of these Directions, those equity shares shall be reckoned as NPI. (v) If any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities, including preference shares issued by the same issuer shall also be treated as NPI and vice versa. Provided that this stipulation shall not be applicable in cases where only the preference shares are classified as NPI, and in such cases, the investment in any of the other performing securities issued by the same issuer need not be classified as NPI and any performing credit facilities granted to that borrower need not be treated as NPA. (vi) In case of conversion of principal and/or interest into equity, debentures, bonds, etc., such instruments shall be treated as NPA ab initio in the same asset classification category as the loan, if the loan's classification is substandard or doubtful on implementation of the restructuring package and provision shall be made as per the norms. (vii) Government guaranteed investment
Chapter X 20. Small Finance Banks The provisions of these Directions shall be applicable to Small Finance Banks in so far as these provisions are not in conflict with the Guidelines for Licensing of Small Finance Banks in the Private Sector and Operating Guidelines for Small Finance Banks dated October 6, 2016, as amended from time to time. 21. Payments Banks (PBs) (i) PBs shall, on any given day, maintain a minimum investment to the extent of not less than 75 per cent of ‘demand deposit balances’ - DDB (including the earnest money deposits of BCs) as on three working days prior to that day, in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR). (ii) Further, PBs shall, on any given day, maintain balances in demand and time deposits with other scheduled commercial banks, which shall not be more than 25 per cent of its DDB (including the earnest money deposits of BCs) as on three working days prior to that day. (iii) The investments and deposits made according to (i) and (ii) above, together shall not be less than 100 per cent of the DDB (including the earnest money deposits of BCs) of the PB unless it is less to the extent of balances kept with RBI. Note: Balances with other scheduled commercial banks in excess of 25 per cent of DDB (including the earnest money deposits of BCs), is permissible to the extent the excess amount is sourced from funds other than DDB (including the earnest money deposits of BCs). (iv) PBs shall not classify any investment, other than those made out of their own funds, as HTM category. The investments made out of their own funds shall not, in any case be, in assets or investments in respect of which the promoter / a promoter group entity is a direct or indirect obligor. (v) PBs shall not participate in ‘when issued’ and ‘short sale’ transactions. (vi) PBs shall have the option to invest in bank CDs subject to the limit applicable to bank deposits. (vii) The other provisions of these Directions shall be applicable to Payments Banks in so far as these provisions are not in conflict with the Guidelines for Licensing of Payments Banks and Operating Guidelines for Payments Banks dated October 6, 2016, as amended from time to time. 22.1 With the issue of these Directions, the instructions / guidelines contained in the circulars mentioned in the Annex IV issued by the Reserve Bank stand repealed. 22.2 All approvals / acknowledgements given under the above circulars shall be deemed as given under these Directions. 22.3 All the repealed circulars are deemed to have been in force prior to the coming into effect of these Directions. Deleted List of Circulars repealed by the Master Direction
1 Securities, for the limited purpose of this sub-section, shall mean direct investment in equity shares, preference shares, convertible bonds / debentures and equity-like products. 2 Banks shall classify the foreign investments into five categories (viz. Government securities (including local authorities), Shares, Debentures & Bonds, Subsidiaries and / or joint ventures abroad and other investments (to be specified)) and depreciation / appreciation shall be aggregated for each classification separately. However, in the balance sheet, banks shall continue to report the foreign securities under three categories (Government securities (including local authorities), subsidiaries and/or joint ventures abroad and other investments (to be specified)). 3 Special securities at present comprise Oil Bonds; Fertilizer Bonds; bonds issued to the State Bank of India (during the 2008 rights issue), Industrial Finance Corporation of India Ltd., and Food Corporation of India. 4 Non-SLR securities for this chapter means securities issued by corporates, banks, financial institutions and State and Central Government sponsored institutions, Special Purpose Vehicles (SPVs) etc., and shall also include capital gains bonds and bonds eligible for priority sector status. 5 Investments in these instruments shall be treated as “Capital Market Exposure”. 6 The weighted average maturity shall be calculated as average of the remaining period of maturity of securities weighted by the sums invested. 7 Although the Securities Contracts (Regulation) Act, 1956 defines the term `securities' to mean corporate shares, debentures, Government Securities and rights or interest in securities, the term ‘securities' here would exclude corporate shares. 8 The Provident / Pension Funds and Trusts registered under the Indian Trusts Act, 1882, shall be outside the purview of the expression `non-bank clients’. 9 The limit shall cover both the business initiated by a bank and the business offered/brought to the bank by a broker. 10 This accounting treatment does not take into account the tax implications and banks shall comply with the requirements of Income Tax Authorities as prescribed 11 Banks were advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19, to reach a level of 2 per cent of their AFS and HFT portfolio within a period of three years where feasible, to build up adequate reserves to protect against increase in yields in future. 12 Illustratively, banks shall have the option to draw down from the IRA to the extent of provision made during the year towards depreciation in investment in AFS and HFT categories (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such excess provision). In other words, a bank which pays a tax of 30 per cent and should appropriate 25 per cent of the net profits to Statutory Reserves, can draw down Rs.52.50 from the IRA, if the provision made for depreciation in investments included in the AFS and HFT categories is Rs.100. |