Prudential guidelines on management of the non-SLR investment portfolio by banks
ANNEXURE
Guidelines on investments
by SCBs and DCCBs in Non-SLR Debt Securities
Coverage
- These guidelines cover banks’ investments in
Non-SLR debt instruments / securities issued by All-India Financial Institutions,
and State and Central Government sponsored institutions, etc. The guidelines
will apply to investments both in the primary market as well as the secondary
market. However, these instructions are not applicable to a DCCB’s investments
in the share capital of the state co-operative bank of the state concerned.
- Definitions of a few terms used in these guidelines
have been furnished in Appendix I with a view to ensuring uniformity in approach
while implementing the guidelines.
Regulatory requirements
- Banks should not invest in non-SLR securities
of original maturity of less than one year.
- Banks should undertake usual due diligence in
respect of investments in non-SLR securities. Present RBI regulations preclude
banks from extending credit facilities for certain purposes. Banks should
ensure that such activities are not financed by way of funds raised through
the non-SLR securities.
- Banks must not invest in unrated debt securities
and unlisted shares of All-India Financial Institutions.
- The Securities Exchange Board of India (SEBI),
vide their circular dated September 30, 2003, have stipulated requirements
to be complied with by listed companies for issuing debt securities on a private
placement basis and listed on a stock exchange. According to this circular
any listed company, making issue of debt securities on a private placement
basis and listed on a stock exchange, has to make full disclosures (initial
and continuing) in the manner prescribed in Schedule II of the Companies Act
1956, SEBI (Disclosure and Investor Protection) Guidelines, 2000 and the Listing
Agreement with the exchanges. Further, the debt securities should carry a
credit rating of not less than investment grade from a Credit Rating Agency
registered with the SEBI. Banks should ensure that they make all fresh Non-SLR
debt investments only in listed debt securities of public sector undertakings
and All-India Financial Institutions which comply with the requirements of
the SEBI circular dated September 30, 2003.
Internal assessments
7. Since non-SLR securities are
mostly in the form of credit substitutes, banks are advised to (i) subject all
their investment proposals relating to non-SLR securities to credit appraisal
on par with their credit proposals, irrespective of the fact that the proposed
investments may be in rated securities, (ii) make their own internal credit
analysis and rating even in respect of rated issues and that they should not
entirely rely on the ratings of external agencies, and (iii) strengthen their
internal rating systems which should also include building up of a system of
regular (quarterly or half-yearly) tracking of the financial position of the
issuer with a view to ensuring continuous monitoring of the rating migration
of the issuers/issues.
Fixing of prudential limits
8. The Board of Directors of banks
should fix a prudential limit for their total investment in non-SLR securities
subject to existing limits prescribed by RBI and sub-limits for the following
debt securities:
a) bonds of public sector undertakings
b) bonds / equity of All-India
Financial Institutions (AFIs)
The total investment in (a) and
(b) above should not exceed 10 per cent of the bank’s total deposits as on March
31, of the previous year, with a sub-ceiling of 5 per cent for investments covered
under (a).
9. Banks which have exposure to
investments in non-SLR securities in excess of the prudential limit prescribed
above as on 31st March 2003 should not make any fresh investment in such securities
till they ensure compliance with the above prudential limit.
10. As a matter of prudence,
banks should stipulate entry-level minimum ratings/ quality standards and industry-wise,
maturity-wise, duration-wise, issuer-wise etc. limits to mitigate the adverse
impacts of concentration and the risk of illiquidity.
Role of Boards
11. Banks should ensure that
their investment policies duly approved by the Board of Directors are formulated
after taking into account all the relevant issues specified in these guidelines
on non-SLR investment. Banks should put in place proper risk management systems
for capturing and analysing the risk in respect of non-SLR investment and taking
remedial measures in time.
12. The Board should devise
a system to ensure that the limits prescribed in paragraph 8 above are scrupulously
complied with. The Boards should appropriately address the issue of ensuring
compliance with the prudential limits on an ongoing basis.
13. Boards of banks should
review the following aspects of non-SLR investments twice a year:
- Total business (investment and divestment) during
the reporting period
- Compliance with the prudential limits prescribed
by the Board for non-SLR investment
- Rating migration of the issuers/ issues held
in the bank’s books and consequent diminution in the portfolio quality
- Extent of non performing investments in the
non-SLR category
Disclosures
14. Banks should disclose the details
of the issuer composition of non-SLR investments and the non-performing non-SLR
investments in the ‘Notes on Accounts’ of the balance sheet, as indicated in
Appendix II.
Demat form
15. SCBs/DCCBs should make investments
in non-SLR securities in dematerialised form only.
Trading and settlement in debt
securities
16. As per the SEBI guidelines,
all trades with the exception of the spot transactions, in a listed debt security,
shall be executed only on the trading platform of a stock exchange. In addition
to complying with the SEBI guidelines, banks should ensure that all spot transactions
in listed debt securities are reported on the NDS and settled through the CCIL
from a date to be notified by RBI.
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Appendix I
Guidelines on investments
by SCBs/CCBs in non-SLR investment portfolio by banks – Definitions
(Vide paragraph 2 of the Guidelines)
1. With a view to imparting
clarity and to ensure that there is no divergence in the implementation of the
guidelines, some of the terms used in the guidelines are defined below.
2. A security will be treated
as rated if it is subjected to a detailed rating exercise by an external rating
agency in India which is registered with SEBI, and is carrying a current or
valid rating. The rating relied upon will be deemed to be current or valid if
- The credit rating letter relied upon is not
more than one month old on the date of opening of the issue, and
- The rating rationale from the rating agency
is not more than one year old on the date of opening of the issue, and
- The rating letter and the rating rationale is
a part of the offer document.
- In the case of secondary market acquisition,
the credit rating of the issue should be in force and confirmed from the monthly
bulletin published by the respective rating agency.
Securities which do not have a
current or valid rating by an external rating agency would be deemed as unrated
securities.
3. The investment grade
ratings awarded by each of the external rating agencies operating in India
would be identified by the IBA/ FIMMDA. These would also be reviewed by IBA/
FIMMDA at least once a year.
4. A ‘listed’ debt security
is a security which is listed in a stock exchange. If not so, it is an ‘unlisted’
debt security.
5. A non performing investment (NPI), similar
to a non performing advance (NPA), is one where
- Interest/ instalment (including maturity proceeds)
is due and remains unpaid for more than 180 days. The delinquency period
would become 90 days with effect from 31st March 2004.
- The above would apply mutatis-mutandis to
preference shares where the fixed dividend is not paid.
- In the case of equity shares, in the event
the investment in the shares of any company is valued at Re.1 per company
on account of the non availability of the latest balance sheet, those equity
shares would also be reckoned as NPI.
- If any credit facility availed by the issuer
is NPA in the books of the bank, investment in any of the securities issued
by the same issuer would also be treated as NPI.
Appendix II
Prudential guidelines
on management of the non-SLR investment portfolio by SCBs/CCBs – Disclosures
requirements
(vide paragraph 15 of the Guidelines)
Banks should make the following disclosures in
the ‘Notes on Accounts’ of the balance sheet in respect of their non-SLR investment
portfolio, with effect from the financial year ending 31 March 2004.
i) Issuer composition
of non-SLR investments
(Rs. in crore)
No.
(1)
|
Issuer
(2)
|
Amount
(3)
|
Extent of private placement
(4)
|
Extent of ‘below investment
grade’
Securities already invested
(5)
|
Extent of ‘unrated’
securities,
already
invested
(6)
|
Extent of ‘unlisted’
securities
(7)
|
1
|
P S Us
|
|
|
|
|
|
2
|
FIs
|
|
|
|
|
|
3
|
Provision held towards
depreciation
|
|
X X X
|
X X X
|
XXX
|
XXX
|
|
Total
|
|
|
|
|
|
Amounts reported under columns
4 and 5 above may not be mutually exclusive.
ii) Non performing non-SLR investments
Particulars
|
Amount
(Rs. Crore)
|
Opening balance
|
|
Additions during the year
since 1st April
|
|
Reductions during the above
period
|
|
Closing balance
|
|
Total provisions held
|
|
Co-ops.-Non-SLR-Cir-Annex(A)
|