Revamped Investment Norms for Commercial Banks

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Revamped Investment Norms

Revamped Investment Norms: In a significant move, the Reserve Bank of India (RBI) has introduced sweeping changes to the way commercial banks classify, value, and manage their investment portfolios. Following the issuance of a Discussion Paper (DP) in January 2022 and considering feedback from stakeholders, the RBI has now unveiled the “Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023.”

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A Paradigm Shift in Banking Norms

The revised Directions herald a new era with their principled approach to classifying investment portfolios. They also introduce stricter regulations regarding transfers to and from the “Held to Maturity” (HTM) category while emphasizing symmetric recognition of gains and losses. These changes are set to raise the bar for the quality of banks’ financial reporting, enhance disclosure practices, inject vigor into the corporate bond market, encourage the use of derivatives for risk management, and bolster the overall risk management framework of banks. Importantly, the RBI has retained key prudential safeguards, including the requirement for investment fluctuation reserves and due diligence for non-SLR investments.

New Investment Categories and Fair Value Recognition

Under the RBI’s directives, banks are now mandated to categorize their investment portfolios into three distinct segments: “Held to Maturity” (HTM), “Available for Sale” (AFS), and “Fair Value through Profit and Loss” (FVTPL). HTM securities are intended to be held until maturity, AFS securities are acquired with the intention of collecting contractual cash flows while allowing for potential sales, and FVTPL includes securities valued at fair market value, with direct gains or losses impacting the profit and loss account. These changes represent a shift towards recognizing fair values at the time of initial investment and signify a commitment to greater transparency in financial reporting practices.

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