Debt instruments with fixed or determinable payments and fixed maturity with the intent of holding till maturity shall be classified under held to maturity (HTM). Non-SLR securities such as corporate bonds will henceforth not be permitted to be held in HTM.
Bank investments in equity shares of subsidiaries, associates and joint ventures shall also be carried at cost under HTM.
RBI said the discussion paper proposes align the prudential framework with global standards, while retaining some elements considering the domestic context.
“The ceiling on investments in HTM as a percentage to total investments as also the ceiling on SLR securities that can be held in HTM shall be dispensed with. However, the controls for sales out of HTM (barring certain existing exemptions) shall be tightened to ensure that the basic principles and tenets for classification of securities as HTM and valuing them at cost is not invalidated,” RBI said.
Debt instruments which the bank intends to either hold till maturity or sell before maturity shall be eligible for avialable for sale (AFS). Banks shall also have the irrevocable option to classify equity investments at initial recognition under AFS.
“FVTPL is the residual category i.e. all investments that do not qualify for inclusion in HTM or AFS shall be categorised as FVTPL. Illustratively, investments in Securitisation Receipts (SRs), mutual funds, alternate investment funds, equity shares (excluding certain exceptions), derivatives (including those undertaken for hedging), etc. which do not have any contractually specified periodic cash flows that are solely payments of principal and interest on principal outstanding (‘SPPI criterion’) shall be classified as FVTPL,” RBI said.
The paper proposes that all investments and derivatives be valued at fair value on initial recognition. Where the acquisition cost is not the same as the fair value and the security is not quoted and cannot be priced using market-based inputs, the loss, if any shall be immediately recognised while the gains shall be deferred.
The RBI has proposed that the revised framework with effect from April 1, 2023 with banks being allowed to make the transitional adjustments based on the MTM position as at that date in the balance of ‘Reserves and Surplus’. Comments on the changes have been asked till February 15.
Securities held in HTM shall be carried at cost and not require marking to market after initial recognition. AFS securities on the other hand have to be marked to market (MTM) at least on a quarterly, if not more frequent basis. Such MTM gains and losses shall be directly credited/ debited to AFS-Reserve, without routing through the profit and loss account.
Securities held within the HFT sub-category shall be subject to daily MTM while other securities within FVTPL shall be marked to market at least on a quarterly, if not more frequent basis.
“In order to maintain the consistency of classification and measurement, reclassification between categories shall be prohibited. At the time of transition, banks shall be allowed a one-time option to re-classify their financial instruments and adjust the gains/losses on such reclassification in their reserves,” RBI said.
Investment Reserve Account (IRA) shall be discontinued and its balance shall be transferred to any reserve under “Revenue and Other Reserves” which is reckoned for CET 1.
The central bank has suggested that The Institute of Chartered Accountants of India (ICAI) update its guidance note on accounting for derivatives contracts for the presentation framework of banks.