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RBI Revises Investment Categorization Guidelines to Align with Global Standards

 

Changes to Holding Period and Investment Categories for Banks

 

RBI Removes 90-Day Ceiling on HFT Category

The Reserve Bank of India (RBI) has revised its guidelines for banks to establish consistency with global standards in categorizing investments. Building on a discussion paper released in January 2022, RBI announced on Tuesday the elimination of the 90-day holding period limit for securities classified under the Held For Trading (HFT) category.

 

Banks to Classify Illiquid Bonds and State Development Loans Under HFT

Bankers anticipate that this amendment will lead banks to classify illiquid bonds and state development loans under the HFT category. Previously, uncertainty persisted as to whether these securities could be sold within 90 days of acquisition.

 

Ceiling on HTM Category Also Removed

Similarly, RBI has removed the ceiling on the held-to-maturity (HTM) category within banks’ investment portfolios.

Banks Currently Allowed to Allocate More than 25% of Total Investments to HTM

Currently, banks are permitted to allocate more than 25% of their total investments to the HTM category, provided that investments in government securities to fulfill the statutory liquidity ratio (SLR) requirement are capped at 18%.

 

Revised Guidelines Effective from April 1, 2024

The revised guidelines will come into effect on April 1, 2024. RBI states that these directions aim to enhance the quality of banks’ financial reporting, improve disclosures, boost the corporate bond market, facilitate hedging through derivatives, and strengthen overall risk management frameworks.

 

Introduction of Fair Value Through Profit and Loss (FVTPL) Category

RBI has also introduced a new investment category called fair value through profit and loss (FVTPL). The existing HFT category will now be part of the FVTPL category, as outlined in the revised guidelines.

 

Investment Portfolio Classification into FVTPL, HTM, and AFS

Banks’ investment portfolios will now be classified into three categories: FVTPL, HTM, and available for sale (AFS). The HFT category, previously reserved for debt securities to be sold in a short period, will now fall under the FVTPL category, where debt instruments are measured at fair value through the profit and loss account.

 

Restrictions on AFS and HTM Categories

Furthermore, RBI has prohibited the inclusion of instruments with loss-absorbing features, such as those qualifying for additional tier 1 or tier 2 capital regulations, equity, and preference shares, in the available for sale (AFS) or HTM categories.

Increased Accounting Work for Investments Under FVTPL

Banks will now be required to hold investments under the FVTPL category, resulting in more frequent accounting tasks to maintain compliance with the revised guidelines.

 

Disclaimer:

The information provided in this article is based on the latest Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and other applicable material available at the time of compilation. We have diligently ensured the completeness and accuracy of the material. However, it is essential for users to consult the relevant legislation for specific guidance. Please note that the data provided may be subject to change without prior notice and should not be considered as professional advice. Estabizz Fintech holds no liability for any outcomes resulting from the use of this material.

 

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