The updated criteria were released by the RBI on Tuesday, aligning them with international standards and best practices for the categorization, appraisal, and management of commercial banks’ investment portfolios.
All commercial banks, with the exception of regional rural banks, will be subject to the updated Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023, starting on April 1, 2024.
Principle-based classification of investment portfolios, tighter rules for transfers into and out of the held-to-maturity (HTM) category and sales out of HTM, inclusion of non-SLR (statutory liquidity ratio) securities in HTM subject to fulfillment of certain conditions, and symmetric recognition of gains and losses are all included in the revised directions.
According to the updated regulations, banks must divide their whole investment portfolio into three groups: held to maturity (HTM), available for sale (AFS), and fair value through profit and loss (FVTPL).
“Within FVTPL, a distinct investment subcategory known as Held for Trading (HFT) will exist. The bank must pick the investment’s category before or at the time of purchase, and this choice must be adequately recorded, according to the Reserve Bank.
Banks are presently obliged to abide by regulatory rules on the categorization and valuation of investment portfolios. These guidelines were released in October 2000 and were based on the then-current worldwide standards and best practices.
The updated regulatory framework for the investment portfolio has been released, according to the RBI, in light of the considerable advancement in international financial reporting requirements, the connections with the capital adequacy framework, as well as growth in local financial markets.
The guidelines, according to the statement, are anticipated to improve disclosures, boost the corporate bond market, make it easier to employ derivatives for hedging, and increase banks’ overall risk management framework.