Tuesday, January 27, 2009

classification of bank portfolio

Classification
i) The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories
viz. ‘Held to Maturity’, ‘Available for Sale’ and ‘Held for Trading’. However, in the balance sheet, the investments will continue to be disclosed as per the existing six classifications:
viz. a) Government securities, b) Other approved securities, c) Shares, d) Debentures & Bonds, e) Subsidiaries/ joint ventures and f) Others (CP, Mutual Fund Units, etc.).
ii) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
2.1 Held to Maturityi). The securities acquired by the banks with the intention to hold them up to maturity will be classified under ‘Held to Maturity (HTM)’.
ii). Banks are allowed to include investments included under HTM category upto 25 per cent of their total investmentsThe following investments are required to be classified under HTM but are not counted for the purpose of ceiling of 25 per cent specified for this category;a.Re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes.
b.Investment in subsidiaries and joint ventures (A Joint Venture would be one in which the bank, along with its subsidiaries, holds more than 25 percent of the equity).c.The investments in debentures/bonds, which are deemed to be in the nature of advance. [Refer sub-paragraph (vii) below]iii). Banks are, however, allowed since September 2, 2004 to exceed the limit of 25 percent of total investment under HTM category provided:
d) the excess comprises only of SLR securities, and
e) the total SLR securities held in the HTM is not more than 25 percent of their DTL as on the last Friday of the second preceding fortnight.ii)The non-SLR securities, held as part of HTM as on September 2, 2004 may remain in that category. No fresh non-SLR securities, are permitted to be included in HTM, except the following:
(a) Fresh re-capitalisation bonds, received from the Government of India, towards their re-capitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes.
(b) Fresh investment in the equity of subsidiaries and joint ventures.
(c) RIDF / SIDBI deposits
iii) To sum up, banks may hold the following securities under HTM:
(a) SLR Securities upto 25 percent of their DTL as on the last Friday of the second preceding fortnight.
(b) Non-SLR securities included under HTM as on September 2, 2004.
(c) Fresh re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in Investment portfolio.
(d) Fresh investment in the equity of subsidiaries and joint ventures
(e) RIDF/SIDBI deposits.
(vi) Profit on sale of investments in this category should be first taken to the Profit & Loss Account, and thereafter be appropriated to the ‘Capital Reserve Account’. Loss on sale will be recognised in the Profit & Loss Account.
(vii) The debentures/ bonds must be treated in the nature of an advance when:
The debenture/bond is issued as part of the proposal for project finance and the tenure of the debenture is for a period of three years and aboveOrThe debenture/bond is issued as part of the proposal for working capital finance and the tenure of the debenture/ bond is less than a period of one yearAnd the bank has a significant stake i.e.10% or more in the issue
Andthe issue is part of a private placement, i.e. the borrower has approached the bank/FI and not part of a public issue where the bank/FI has subscribed in response to an invitation.
Since, no fresh non-SLR securities are permitted to be included in the HTM, these investments should not be held under HTM category and they should be subjected to subject to mark- to-market discipline. They would be subjected to prudential norms for identification of non-performing investment and provisioning as applicable to investments.
2.2 Available for Sale & Held for Trading
i) The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under ‘Held for Trading (HFT)’.
ii) The securities which do not fall within the above two categories will be classified under ‘Available for Sale (AFS)’.
iii) The banks will have the freedom to decide on the extent of holdings under HFT and AFS. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position.
iv) The investments classified under HFT would be those from which the bank expects to make a gain by the movement in the interest rates/market rates. These securities are to be sold within 90 days.
v) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.
2.3 Shifting among categories
i) Banks may shift investments to/from HMT with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from HTM will be allowed during the remaining part of that accounting year.
ii) Banks may shift investments from AFS to HFT with the approval of their Board of Directors/ ALCO/ Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the bank/Head of the ALCO, but should be ratified by the Board of Directors/ ALCO.
iii) Shifting of investments from HFT to AFS is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions, or extreme volatility, or market becoming unidirectional. Such transfer is permitted only with the approval of the Board of Directors/ ALCO/ Investment Committee.
iv) Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. Banks may apply the values as on the date of transfer and in case, there are practical difficulties in applying the values as on the date of transfer, banks have the option of applying the values as on the previous working day, for arriving at the depreciation requirement on shifting of securities.

1 comment:

  1. This is really an awesome blog, good for the people who are in accounting and market freaks.
    Keep it up Bro!

    ReplyDelete