Context: 

The Reserve Bank of India has introduced revised guidelines for banks to categorize their investments in alignment with global standards which will be effective from April 1, 2024.

Revised  Norms:

• Investment Categories: Banks will classify their investment portfolios into three categories – 
  • Held to Maturity (HTM), 
  • Available for Sale (AFS), and 
  • Fair Value Through Profit and Loss (FVTPL).
• Held for Trading (HFT) is now a separate subcategory within FVTPL
• Documentation: Banks must decide on the investment category at the time of acquisition and properly document it.
• Reclassification Restriction: Banks cannot reclassify investments between categories without approval from their boards and the regulator.
• Daily Valuation for HFT: Securities classified under HFT within FVTPL must be fair-valued on a daily basis.
• Investment Fluctuation Reserve (IFR): Banks are required to create an IFR equal to at least 2% of the AFS and FVTPL portfolio to address yield fluctuations.
• Sale Limit for HTM: Sale of investments from the HTM category in a financial year should not exceed 5% of the opening carrying value without RBI approval.
• No Investment Reserve Account (IRA): The requirement for an Investment Reserve Account (IRA) has been dispensed with.
• Subsidiary Investments: Investments in subsidiaries, associates, and joint ventures should be held at acquisition cost, with any premium or discount amortized over the instrument’s remaining life.

Benefits Of Move:

These changes are expected to enhance financial reporting quality, improve disclosures, boost the corporate bond market, and strengthen banks’ risk management.

Source: Business Standard