RBI/2008-09/ 34
DBOD No. BP. BC. 5 / 21.04.141 / 2008-09
July 1, 2008
All Commercial Banks
(excluding Regional Rural Banks)
Dear Sir,
Master Circular – Prudential norms for classification,
valuation and operation of investment portfolio by banks
Please refer to the Master Circular No. DBOD. BP. BC.15 / 21.04.141/ 2007-08 dated July 2, 2007, containing consolidated instructions/guidelines issued to banks till June 30, 2007, on matters relating to prudential norms for classification, valuation and operation of investment portfolio by banks. The above Master Circular has since been suitably updated by incorporating instructions/guidelines issued between July, 2007 and June 30, 2008, and furnished in the Annex. This updated version has also been placed on the RBI web-site (http://www.rbi.org.in).
2. An appendix containing a list of circulars referred for the purpose of the current Master circular is furnished at the end of the Annex.
Yours faithfully,
(Prashant Saran)
Chief General Manager-in-Charge
MASTER CIRCULAR – PRUDENTIAL NORMS FOR
CLASSIFICATION,
VALUATION AND OPERATION OF INVESTMENT
PORTFOLIO BY BANKS
Table of Contents
MASTER CIRCULAR – PRUDENTIAL NORMS FOR
CLASSIFICATION,
VALUATION AND OPERATION
OF INVESTMENT PORTFOLIO BY BANKS
1. Introduction
With the introduction of prudential norms on capital adequacy, income recognition,
asset classification and provisioning requirements, the financial position of
banks in India has improved in the last few years. Simultaneously, trading in
securities market has improved in terms of turnover and the range of maturities
dealt with. In view of these developments and taking into consideration the evolving
international practices, Reserve Bank of India (RBI) has issued guidelines on
classification, valuation and operation of investment portfolio by banks from
time to time as detailed below: 1.1 Investment Policy
i) Banks should frame Internal Investments Policy Guidelines
and obtain the Board’s approval. The investment policy may be suitably framed/amended
to include PD activities also. Within the overall framework of the investment
policy, the PD business undertaken by the bank will be limited to dealing, underwriting
and market –making in Government Securities. Investments in Corporate/ PSUs/
FIs bonds, Commercial Papers, Certificate of Deposits, debt mutual funds and other
fixed income securities will not be deemed to be part of PD business. The investment
policy guidelines should be implemented to ensure that operations in securities
are conducted in accordance with sound and acceptable business practices. While
framing the investment policy, the following guidelines are to be kept in view
by the banks: (a) Banks may sell a government security
already contracted for purchase, provided: (i) The purchase
contract is confirmed prior to the sale, (ii) The purchase
contract is guaranteed by CCIL or the security is contracted for purchase from
the Reserve Bank and, (iii) the sale transaction will settle
either in the same settlement cycle as the preceding purchase contract, or in
a subsequent settlement cycle so that the delivery obligation under the sale contract
is met by the securities acquired under the purchase contract (e.g. when a security
is purchased on T+0 basis, it can be sold on either T+0 or T+1 basis on the day
of the purchase; if however it is purchased on T+1 basis, it can be sold on T+1
basis on the day of purchase or on T+0 or T+1 basis on the next day). For
purchase of securities from RBI through Open Market Operations (OMO), no sale
transactions should be contracted prior to receiving the confirmation of the deal/advice
of allotment from the RBI. - In addition to the above,
the Scheduled Commercial Banks (other than RRBs and LABs) and Primary Dealers
have been permitted to short sell Government securities in accordance with the
requirements specified in Annexure I - A.
- Further, the NDS-OM members have been permitted to transact on ‘When
Issued’ basis in Central Government dated securities, subject to the guidelines
specified in Annexure I-B.
(b) Banks
successful in the auction of primary issue of government may enter into contracts
for sale of the allotted securities in accordance with the terms and conditions
as per Annexure I-C. (c) The settlement
of all outright secondary market transactions in Government Securities will be
done on a standardized T+1 basis effective May 24, 2005. (d)
All the transactions put through by a bank, either on outright basis or ready
forward basis and whether through the mechanism of Subsidiary General Ledger (SGL)
Account or Bank Receipt (BR), should be reflected on the same day in its investment
account and, accordingly, for SLR purpose wherever applicable. (e)
The brokerage on the deal payable to the broker, if any, (if the deal
was put through with the help of a broker) should be clearly indicated on the
notes/ memoranda put up to the top management seeking approval for putting through
the transaction and a separate account of brokerage paid, broker-wise, should
be maintained. (f) For issue of BRs, the banks should
adopt the format prescribed by the Indian Banks' Association (IBA) and strictly
follow the guidelines prescribed by them in this regard. The banks, subject to
the above, could issue BRs covering their own sale transactions only and should
not issue BRs on behalf of their constituents, including brokers. (g)
The banks should be circumspect while acting as agents of their broker clients
for carrying out transactions in securities on behalf of brokers. (h)
Any instance of return of SGL form from the Public Debt Office of the Reserve
Bank for want of sufficient balance in the account should be immediately brought
to Reserve Bank's notice with the details of the transactions. (i)
Banks desirous of making investment in equity shares/ debentures should
observe the following guidelines: (i) Build up adequate
expertise in equity research by establishing a dedicated equity research department,
as warranted by their scale of operations; (ii) Formulate
a transparent policy and procedure for investment in shares, etc., with the approval
of the Board. (iii) The decision in regard to direct investment
in shares, convertible bonds and debentures should be taken by the Investment
Committee set up by the bank's Board. The Investment Committee should be held
accountable for the investments made by the bank. ii)
With the approval of respective Boards, banks should clearly lay down the broad
investment objectives to be followed while undertaking transactions in securities
on their own investment account and on behalf of clients, clearly define the authority
to put through deals, procedure to be followed for obtaining the sanction of the
appropriate authority, procedure to be followed while putting through deals, various
prudential exposure limits and the reporting system. While laying down such investment
policy guidelines, banks should strictly observe Reserve Bank's detailed instructions
on the following aspects: (a) Ready Forward (buy back) deals (Paragraph
1.1.1) (b) Transactions through Subsidiary General Ledger A/c (Paragraph 1.1.2)
(c) Use of Bank Receipts (Paragraph 1.1.3) (d) Retailing of Government securities
(Paragraph 1.1.4) (e) Internal Control System (Paragraph 1.1.5) (f) Dealings
through Brokers (Paragraph 1.1.6) (g) Audit, Review and Reporting (Paragraph
1.1.7) (h) Non- SLR investments (Paragraph 1.1.8) iii)
The aforesaid instructions will be applicable mutatis mutandis, to the subsidiaries
and mutual funds established by banks, except where they are contrary to or inconsistent
with, specific regulations of Securities and Exchange Board of India (SEBI) and
RBI governing their operations. 1.1.1 Ready Forward
Contracts in Government Securities. The terms and conditions
subject to which ready forward contracts (including reverse ready forward contracts)
may be entered into, are as under: (a) Ready forward contracts
may be undertaken only in (i) Dated Securities and Treasury Bills issued by Government
of India and (ii) Dated Securities issued by State Governments. (b)
Ready forward contracts in the above-mentioned securities may be entered into
by: i) persons or entities maintaining a Subsidiary General
Ledger (SGL) account with RBI, Mumbai and ii) the following
categories of entities who do not maintain SGL accounts with the RBI but maintain
gilt accounts (i.e gilt account holders) with a bank or any other entity (i.e.
the custodian) permitted by the RBI to maintain Constituent Subsidiary General
Ledger (CSGL) account with its Public Debt Office, Mumbai: (a)
Any scheduled bank, (b) Any primary dealer authorised by
the RBI, (c) Any non-banking financial company registered
with the RBI, other than Government companies as defined in Section 617 of the
Companies Act, 1956, (d) Any mutual fund
registered with the SEBI, (e) Any housing
finance company registered with the National Housing Bank, and (f)
Any insurance company registered with the Insurance Regulatory and Development
Authority. (g) Any non-scheduled Urban Co-operative bank, (h)
Any listed company, having a gilt account with a scheduled commercial bank, subject
to the following conditions. (1) The minimum
period for Reverse Repo (lending of funds) by listed companies is seven days.
However, listed companies can borrow funds through repo for shorter periods including
overnight; (2) Where the listed company is a 'buyer' of
securities in the first leg of the repo contract (i.e. lender of funds), the custodian
through which the repo transaction is settled should block these securities in
the gilt account and ensure that these securities are not further sold or re-repoed
during the repo period but are held for delivery under the second leg; and (3)
The counterparty to the listed companies for repo / reverse repo transactions
should be either a bank or a Primary Dealer maintaining SGL Account with the RBI. (c)
All persons or entities specified at (ii) above can enter into ready
forward transactions among themselves subject to the following restrictions:
i) An SGL account holder may not enter into a ready forward contract
with its own constituent. That is, ready forward contracts should not be undertaken
between a custodian and its gilt account holder. ii) Any
two gilt account holders maintaining their gilt accounts with the same custodian
(i.e., the CSGL account holder) may not enter into ready forward contracts with
each other, and iii) Cooperative banks
may not enter into ready forward contracts with the non-banking financial companies.
This restriction would not apply to repo transactions between Urban Co-operative
banks and authorised Primary Dealers in Government Securities. (d)
All ready forward contracts shall be reported on the Negotiated Dealing System
(NDS). In respect of ready forward contracts involving gilt account holders, the
custodian (i.e., the CSGL account holder) with whom the gilt accounts are maintained
will be responsible for reporting the deals on the NDS on behalf of the constituents
(i.e. the gilt account holders). (e) All ready forward
contracts shall be settled through the SGL Account / CSGL Account maintained with
the RBI, Mumbai, with the Clearing Corporation of India Ltd. (CCIL) acting as
the central counter party for all such ready forward transactions. (f)
The custodians should put in place an effective system of internal control and
concurrent audit to ensure that: i) ready forward transactions
are undertaken only against the clear balance of securities in the gilt account, ii)
all such transactions are promptly reported on the NDS, and iii)
other terms and conditions referred to above have been complied with. (g)
The RBI regulated entities can undertake ready forward transactions only in securities
held in excess of the prescribed Statutory Liquidity Ratio (SLR) requirements. (h)
No sale transaction shall be put through, in the first leg of a ready forward
transaction by CSGL constituent entities, without actually holding the securities
in the portfolio. (i) Securities purchased
under the ready forward contracts shall not be sold during the period of the contract
except by entities permitted to undertake short selling. (j)
Double ready forward deals in any security are strictly prohibited (k)
The guidelines for uniform accounting for Repo / Reverse Repo transactions are
furnished in paragraph 4. 1.1.2 Transactions through
SGL account The following instructions should be followed
by banks for purchase / sale of securities through SGL A/c, under the Delivery
Versus Payment (DvP) System wherein the transfer of securities takes place simultaneously
with the transfer of funds. It is, therefore, necessary for both the selling bank
and the buying bank to maintain current account with the RBI. As no ‘Overdraft
facility’ in the current account would be extended, adequate balance in
current account should be maintained by banks for effecting any purchase transaction. i)
All transactions in Govt. securities for which SGL facility is available should
be put through SGL A/Cs only. ii) Under no circumstances,
a SGL transfer form issued by a bank in favour of another bank should bounce for
want of sufficient balance of securities in the SGL A/c of seller or for want
of sufficient balance of funds in the current a/c of the buyer. iii)
The SGL transfer form received by purchasing banks should be deposited in their
SGL A/Cs. immediately i.e. the date of lodgement of the SGL Form with RBI shall
be within one working day after the date of signing of the Transfer Form. While
in cases of OTC trades, the settlement has to be only on 'spot' delivery basis
as per Section 2(i) of the Securities Contract Act, 1956, in cases of deals on
the recognised Stock Exchanges; settlement should be within the delivery period
as per their rules, bye laws and regulations. In all cases, participants must
indicate the deal/trade/contract date in Part C of the SGL Form under 'Sale date'.
Where this is not completed the SGL Form will not be accepted by the RBI. iv)
No sale should be effected by way of return of SGL form held by the bank. v)
SGL transfer forms should be signed by two authorised officials of the
bank whose signatures should be recorded with the respective PDOs of the RBI and
other banks. vi) The SGL transfer forms should be in the
standard format prescribed by the RBI and printed on semi-security paper of uniform
size. They should be serially numbered and there should be a control system in
place to account for each SGL form. vii) If a SGL transfer
form bounces for want of sufficient balance in the SGL A/c, the (selling) bank
which has issued the form will be liable to the following penal action against
it : a) The amount of the SGL form (cost of purchase
paid by the purchaser of the security) would be debited immediately to the current
account of the selling bank with the RBI. b) In the event
of an overdraft arising in the current account following such a debit, penal interest
would be charged by the RBI, on the amount of the overdraft, at a rate of 3 percentage
points above the Discount and Finance House of India's (DFHI) call money lending
rate on the day in question. However, if the DFHI's closing call money rate is
lower than the prime lending rate of banks, as stipulated in the RBI's interest
rate directive in force, the applicable penal rate to be charged will be 3 percentage
points, above the prime lending rate of the bank concerned, and c)
If the bouncing of the SGL form occurs thrice, the bank will be debarred from
trading with the use of the SGL facility for a period of 6 months from the occurrence
of the third bouncing. If, after restoration of the facility, any SGL form of
the concerned bank bounces again, the bank will be permanently debarred from the
use of the SGL facility in all the PDOs of the RBI. d)
The bouncing on account of insufficient balance in the current account of the
buying bank would be reckoned (against the buying bank concerned) for the purpose
of debarment from the use of SGL facility on par with the bouncing on account
of insufficient balance in SGL a/c. of the selling bank (against selling bank).
Instances of bouncing in both the accounts (i.e SGL a/c and current a/c) will
be reckoned together against the SGL account holder concerned for the purpose
of debarment (i.e three in a half-year for temporary suspension and any bouncing
after restoration of SGL facility, for permanent debarment.) 1.1.3
Use of Bank Receipt (BR) The banks should follow the following
instructions for issue of BRs: a) No BR should be issued
under any circumstances in respect of transactions in Govt. securities for which
SGL facility is available. b) Even in the case of other
securities, BR may be issued for ready transactions only, under the following
circumstances: (i) The scrips are yet to be issued by the
issuer and the bank is holding the allotment advice. (ii)
The security is physically held at a different centre and the bank is in a position
to physically transfer the security and give delivery thereof within a short period. (iii)The
security has been lodged for transfer / interest payment and the bank is holding
necessary records of such lodgements and will be in a position to give physical
delivery of the security within a short period. c) No BR
should be issued on the basis of a BR (of another bank) held by the bank and no
transaction should take place on the basis of a mere exchange of BRs held by the
bank. d) BRs could be issued covering transactions relating
to banks' own Investments Accounts only, and no BR should be issued by banks covering
transactions relating to either the Accounts of Portfolio Management Scheme (PMS)
Clients or Other Constituents' Accounts, including brokers. e)
No BR should remain outstanding for more than 15 days. f)
A BR should be redeemed only by actual delivery of scrips and not by cancellation
of the transaction/set off against another transaction. If a BR is not redeemed
by delivery of scrips within the validity period of 15 days, the BR should be
deemed as dishonoured and the bank which has issued the BR should refer the case
to the RBI, explaining the reasons under which the scrips could not be delivered
within the stipulated period and the proposed manner of settlement of the transaction.
g) BRs should be issued on semi-security paper, in the
standard format (prescribed by IBA), serially numbered and signed by two authorised
officials of the bank, whose signatures are recorded with other banks. As in the
case of SGL forms, there should be a control system in place to account for each
BR form. h) Separate registers of BRs issued and BRs received
should be maintained and arrangements should be put in place to ensure that these
are systematically followed up and liquidated within the stipulated time limit. i)
The banks should also have a proper system for the custody of unused
B.R. Forms and their utilisation. The existence and operations of these controls
at the concerned offices/ departments of the bank should be reviewed, among others,
by the statutory auditors and a certificate to this effect may be forwarded every
year to the Regional Office of Department of Banking Supervision (DBS), RBI, under
whose jurisdiction the Head Office of the bank is located. j)
Any violation of the instructions relating to BRs would invite penal action, which
could include raising of reserve requirements, withdrawals of refinance facility
from the RBI and denial of access to money markets. The RBI may also levy such
other penalty as it may deem fit in accordance with the provisions of the Banking
Regulation Act, 1949. 1.1.4 Retailing of Government
Securities The banks may undertake retailing of Government
securities with non-bank clients subject to the following conditions:
i) Such retailing should be on outright basis and there is no
restriction on the period between sale and purchase. ii) The
retailing of Government securities should be on the basis of ongoing market rates/
yield curve emerging out of secondary market transactions. 1.1.5
Internal Control System The banks should observe the following
guidelines for internal control system in respect of investment transactions: (a)
There should be a clear functional separation of (i) trading, (ii) settlement,
monitoring and control and (iii) accounting. Similarly, there should be a functional
separation of trading and back office functions relating to banks' own Investment
Accounts, Portfolio Management Scheme (PMS) Clients' Accounts and other Constituents
(including brokers') accounts. The Portfolio Management service may be provided
to clients, subject to strictly following the guidelines in regard thereto (covered
in paragraph 1.3.3). Further, PMS Clients Accounts should be subjected to a separate
audit by external auditors. (b) For every transaction
entered into, the trading desk should prepare a deal slip which should contain
data relating to nature of the deal, name of the counter-party, whether it is
a direct deal or through a broker, and if through a broker, name of the broker,
details of security, amount, price, contract date and time. The deal slips should
be serially numbered and controlled separately to ensure that each deal slip has
been properly accounted for. Once the deal is concluded, the dealer should immediately
pass on the deal slip to the back office for recording and processing. For each
deal there must be a system of issue of confirmation to the counterparty. The
timely receipt of requisite written confirmation from the counterparty, which
must include all essential details of the contract, should be monitored by the
back office. (c) With respect to transactions matched on
the NDS-OM module, since CCIL is the central counterparty to all deals, exposure
of any counterparty for a trade is only to CCIL and not to the entity with who
a deal matches. Besides, details of all deals on NDS-OM are available to the counterparties
as and when required by way of reports on NDS-OM itself. In view of the above,
the need for counterparty confirmation of deals matched on NDS-OM does not arise.
However, all government securities transactions, other than those matched on NDS-OM,
will continue to be physically confirmed by the back offices of the counterparties,
as hitherto. (d) Once a deal has been concluded, there
should not be any substitution of the counter party bank by another bank by the
broker, through whom the deal has been entered into; likewise, the security sold/purchased
in the deal should not be substituted by another security. (e) On
the basis of vouchers passed by the back office (which should be done after verification
of actual contract notes received from the broker/ counterparty and confirmation
of the deal by the counterparty), the Accounts Section should independently write
the books of account. (f) In the case of transaction relating
to PMS Clients' Accounts (including brokers), all the relative records should
give a clear indication that the transaction belongs to PMS Clients/ other constituents
and does not belong to bank's own Investment Account and the bank is acting only
in its fiduciary/ agency capacity. (g) (i) Records of SGL
transfer forms issued/ received, should be maintained. (ii) Balances
as per bank's books should be reconciled at quarterly intervals with the balances
in the books of PDOs. If the number of transactions so warrant, the reconciliation
should be undertaken more frequently, say on a monthly basis. This reconciliation
should be periodically checked by the internal audit department. (iii)
Any bouncing of SGL transfer forms issued by selling banks in favour
of the buying bank, should immediately be brought to the notice of the Regional
Office of Department of Banking Supervision of RBI by the buying bank. (iv)
A record of BRs issued/ received should be maintained. (v)
A system for verification of the authenticity of the BRs and SGL transfer
forms received from the other banks and confirmation of authorised signatories
should be put in place. (h) Banks should put in place a
reporting system to report to the top management, on a weekly basis, the details
of transactions in securities, details of bouncing of SGL transfer forms issued
by other banks and BRs outstanding for more than one month and a review of investment
transactions undertaken during the period. (i) Banks should
not draw cheques on their account with the RBI for third party transactions, including
inter-bank transactions. For such transactions, bankers' cheques/ pay orders should
be issued. (j) In case of investment in shares, the surveillance
and monitoring of investment should be done by the Audit Committee of the Board,
which shall review in each of its meetings, the total exposure of the bank to
capital market both fund based and non-fund based, in different forms as stated
above and ensure that the guidelines issued by RBI are complied with and adequate
risk management and internal control systems are in place; (k) The
Audit Committee should keep the Board informed about the overall exposure to capital
market, the compliance with the RBI and Board guidelines, adequacy of risk management
and internal control systems; (l) In order to avoid any
possible conflict of interest, it should be ensured that the stockbrokers as directors
on the Boards of banks or in any other capacity, do not involve themselves in
any manner with the Investment Committee or in the decisions in regard to making
investments in shares, etc., or advances against shares. (m) The
internal audit department should audit the transactions in securities on an on
going basis, monitor the compliance with the laid down management policies and
prescribed procedures and report the deficiencies directly to the management of
the bank. (n) The banks' managements should ensure that
there are adequate internal control and audit procedures for ensuring proper compliance
of the instructions in regard to the conduct of the investment portfolio. The
banks should institute a regular system of monitoring compliance with the prudential
and other guidelines issued by the RBI. The banks should get compliance in key
areas certified by their statutory auditors and furnish such audit certificate
to the Regional Office of DBS, RBI under whose jurisdiction the HO of the bank
falls. 1.1.6 Engagement of brokers i)
For engagement of brokers to deal in investment transactions, the banks
should observe the following guidelines: (a) Transactions
between one bank and another bank should not be put through the brokers' accounts.
The brokerage on the deal payable to the broker, if any (if the deal was put through
with the help of a broker), should be clearly indicated on the notes/memorandum
put up to the top management seeking approval for putting through the transaction
and separate account of brokerage paid, broker-wise, should be maintained. (b)
If a deal is put through with the help of a broker, the role of the broker
should be restricted to that of bringing the two parties to the deal together. (c)
While negotiating the deal, the broker is not obliged to disclose the
identity of the counterparty to the deal. On conclusion of the deal, he should
disclose the counterparty and his contract note should clearly indicate the name
of the counterparty. It should also be ensured by the bank that the broker note
contains the exact time of the deal. Their back offices may ensure that the deal
time on the broker note and the deal ticket is the same. The bank should also
ensure that their concurrent auditors audit this aspect. (d) On
the basis of the contract note disclosing the name of the counterparty, settlement
of deals between banks, viz. both fund settlement and delivery of security should
be directly between the banks and the broker should have no role to play in the
process. (e) With the approval of their top managements,
banks should prepare a panel of approved brokers which should be reviewed annually
or more often if so warranted. Clear-cut criteria should be laid down for empanelment
of brokers, including verification of their creditworthiness, market reputation,
etc. A record of broker-wise details of deals put through and brokerage paid,
should be maintained. (f) A disproportionate part of the
business should not be transacted through only one or a few brokers. Banks should
fix aggregate contract limits for each of the approved brokers. A limit of 5%
of total transactions (both purchase and sales) entered into by a bank during
a year should be treated as the aggregate upper contract limit for each of the
approved brokers. This limit should cover both the business initiated by a bank
and the business offered/ brought to the bank by a broker. Banks should ensure
that the transactions entered into through individual brokers during a year normally
did not exceed this limit. However, if for any reason it becomes necessary to
exceed the aggregate limit for any broker, the specific reasons therefor should
be recorded, in writing, by the authority empowered to put through the deals.
Further, the board should be informed of this, post facto. However, the norm of
5% would not be applicable to banks' dealings through Primary Dealers. (g)
The concurrent auditors who audit the treasury operations should scrutinise
the business done through brokers also and include it in their monthly report
to the Chief Executive Officer of the bank. Besides, the business put through
any individual broker or brokers in excess of the limit, with the reasons therefor,
should be covered in the half-yearly review to the Board of Directors/ Local Advisory
Board. These instructions also apply to subsidiaries and mutual funds of the banks. [Certain
clarifications on the instructions are furnished in the Annexure II.]
ii) Inter-bank securities transactions should be undertaken
directly between banks and no bank should engage the services of any broker in
such transactions. Exceptions: Note (i) Banks
may undertake securities transactions among themselves or with non-bank clients
through members of the National Stock Exchange (NSE), OTC Exchange of India (OTCEI)
and the Stock Exchange, Mumbai (BSE). If such transactions are not undertaken
on the NSE, OTCEI or BSE, the same should be undertaken by banks directly, without
engaging brokers. Note (ii) Although the Securities Contracts
(Regulation) Act, 1956 defines the term `securities' to mean corporate shares,
debentures, Govt. securities and rights or interest in securities, the term `securities'
would exclude corporate shares. The Provident / Pension Funds and Trusts registered
under the Indian Trusts Act, 1882, will be outside the purview of the expression
`non-bank clients' for the purpose of note (i) above. 1.1.7
Audit, review and reporting of investment transactions The
banks should follow the following instructions in regard to audit, review and
reporting of investment transactions: a) Banks should undertake
a half-yearly review (as of 30 September and 31 March) of their investment portfolio,
which should, apart from other operational aspects of investment portfolio, clearly
indicate amendments made to the Investment Policy and certify adherence to laid
down internal investment policy and procedures and RBI guidelines, and put up
the same before their respective Boards within a month, i.e by end-April and end-October.
b) A copy of the review report put up to the Bank's Board,
should be forwarded to the RBI (concerned Regional Office of DBS, RBI)
by 15 May and 15 November respectively. c) In
view of the possibility of abuse, treasury transactions should be separately subjected
to concurrent audit by internal auditors and the results of their audit should
be placed before the CMD of the bank once every month. Banks need not forward
copies of the above mentioned concurrent audit reports to RBI of India. However,
the major irregularities observed in these reports and the position of compliance
thereto may be incorporated in the half yearly review of the investment portfolio.
1.2 Non- SLR investments 1.2.1
(i) Appraisal Banks have made significant investment
in privately placed unrated bonds and, in certain cases, in bonds issued by corporates
who are not their borrowers. While assessing such investment proposals on private
placement basis, in the absence of standardised and mandated disclosures, including
credit rating, banks may not be in a position to conduct proper due diligence
to take an investment decision. Thus, there could be deficiencies in the appraisal
of privately placed issues. (ii) Disclosure requirements in offer
documents The risk arising from inadequate
disclosure in offer documents should be recognised and banks should prescribe
minimum disclosure standards as a policy with Board approval. In this connection,
RBI had constituted a Technical Group comprising officials drawn from treasury
departments of a few banks and experts on corporate finance to study, inter
alia, the methods of acquiring, by banks, of non-SLR investments in general
and private placement route, in particular, and to suggest measures for regulating
these investments. The Group had designed a format containing the minimum disclosure
requirements as well as certain conditionalities regarding documentation and creation
of charge for private placement issues, which may serve as a 'best practice model'
for the banks. The details of the Group’s recommendations are given in the
Annexure III and banks should have a suitable format of disclosure
requirements on the lines of the recommendations of the Technical Group with the
approval of their Board. (iii) Internal assessment
With a view to ensuring that the investments by banks in issues through private
placement, both of the borrower customers and non-borrower customers, do not give
rise to systemic concerns, it is necessary that banks should ensure that their
investment policies duly approved by the Board of Directors are formulated after
taking into account the following aspects: (a) The Boards
of banks should lay down policy and prudential limits on investments in bonds
and debentures including cap and on private placement basis, sub limits for PSU
bonds, corporate bonds, guaranteed bonds, issuer ceiling, etc. (b)
Investment proposals should be subjected to the same degree of credit
risk analysis as any loan proposal. Banks should make their own internal credit
analysis and rating even in respect of rated issues and should not entirely rely
on the ratings of external agencies. The appraisal should be more stringent in
respect of investments in instruments issued by non-borrower customers. (c)
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. (d) 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. (e) The
banks should put in place proper risk management systems for capturing and analysing
the risk in respect of these investments and taking remedial measures in time. (iv)
Some banks / FIs have not exercised due precaution by reference to the
list of defaulters circulated / published by RBI while investing in bonds, debentures,
etc., of companies. Banks may, therefore, exercise due caution, while taking any
investment decision to subscribe to bonds, debentures, shares etc., and refer
to the ‘Defaulters List’ to ensure that investments are not made in
companies / entities who are defaulters to banks / FIs. Some of the companies
may be undergoing adverse financial position, turning their accounts to sub-standard
category due to recession in their industry segment, like textiles. Despite restructuring
facility provided under RBI guidelines, the banks have been reported to be reluctant
to extend further finance, though considered warranted on merits of the case.
Banks may not refuse proposals for such investments in companies whose director’s
name(s) find place in the ‘Defaulter Companies List’ circulated by
RBI, at periodical intervals and particularly in respect of those loan accounts,
which have been restructured under extant RBI guidelines, provided the proposal
is viable and satisfies all parameters for such credit extension. Prudential
guidelines on investment in Non-SLR securities 1.2.2 Coverage
These guidelines cover banks’ investments in non-SLR securities issued
by corporates, banks, FIs and State and Central Government sponsored institutions,
SPVs etc, including, capital gains bonds, bonds eligible for priority sector status.
The guidelines will apply to investments both in the primary market as well as
the secondary market. 1.2.3 The guidelines on listing
and rating pertaining to non-SLR securities vide paragraphs 1.2.7 to 1.2.16
are not applicable to banks’ investments in: (a) Securities
directly issued by the Central and State Governments, which are not reckoned for
SLR purposes. (b) Equity shares (c) Units of equity oriented mutual
fund schemes, viz. those schemes where any part of the corpus can be invested
in equity (d) Equity/debt instruments/Units issued by Venture capital funds
(e) Commercial Paper (f) Certificates of Deposit 1.2.4
Definitions of a few terms used in these guidelines have been furnished
in Annexure IV with a view to ensure uniformity in approach while
implementing the guidelines. Regulatory requirements
1.2.5 Banks should not invest in Non-SLR securities of original
maturity of less than one-year, other than Commercial Paper and Certificates of
Deposits, which are covered under RBI guidelines. 1.2.6 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. Listing
and rating requirements 1.2.7 Banks must not invest in
unrated non-SLR securities. However, the banks may invest in unrated bonds of
companies engaged in infrastructure activities, within the ceiling of 10 per cent
for unlisted non-SLR securities as prescribed vide paragraph 1.2.10 below.1 1.2.8
The Securities Exchange Board of India (SEBI) vide their circular dated
September 30, 2003 have stipulated requirements that listed companies are required
to comply with, for making issue of 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. Furthermore,
the debt securities shall carry a credit rating of not less than investment grade
from a Credit Rating Agency registered with the SEBI. 1.2.9 Accordingly,
while making fresh investments in non-SLR debt securities, banks should ensure
that such investment are made only in listed debt securities of companies which
comply with the requirements of the SEBI circular dated September 30, 2003, except
to the extent indicated in paragraph 1.2.10 and 1.2.11 below. 1 Please refer
to circular DBOD.No.BP.BC.56/21.04.141/200708 dated Dec 6, 2007 Fixing
of prudential limits1.2.10 Bank’s investment in
unlisted non-SLR securities should not exceed 10 per cent of its total investment
in non-SLR securities as on March 31, of the previous year, and such investment
should comply with the disclosure requirements as prescribed by the SEBI
for listed companies. 1.2.11 Bank’s investment in
unlisted non-SLR securities may exceed the limit of 10 per cent, by an additional
10 per cent, provided the investment is on account of investment in securitisation
papers issued for infrastructure projects, and bonds/debentures issued by Securitisation
Companies (SCs) and Reconstruction Companies (RCs) set up under the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFEASI Act) and registered with RBI. In other words, investments exclusively
in securities specified in this paragraph could be up to the maximum permitted
limit of 20 per cent of non-SLR investment. 1.2.12 Investment
in the following will not be reckoned as ‘unlisted non-SLR securities’
for computing compliance with the prudential limits prescribed in the above guidelines: (i)
Security Receipts issued by SCs / RCs registered with RBI. (ii)
Investment in Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS),
which are rated at or above the minimum investment grade. However, there will
be close monitoring of exposures to ABS on a bank specific basis based on monthly
reports to be submitted to RBI as per proforma being separately advised by the
Department of Banking Supervision. 1.2. 13 The investments
in RIDF / SIDBI Deposits may not be reckoned as part of the numerator for computing
compliance with the prudential limit of 10 per cent of its total non-SLR securities
as on March 31, of the previous year. 1.2.14 With effect
from January 1, 2005, only investment in units of such mutual fund schemes, which
have an exposure to unlisted securities of less than 10 per cent of the corpus
of the fund, will be treated on par with listed securities for the purpose of
compliance with the prudential limits prescribed in the above guidelines. While
computing the exposure to the unlisted securities for compliance with the norm
of less than 10 percent of the corpus of the mutual fund scheme, Treasury Bills,
Collateralised Borrowing and Lending Obligations (CBLO), Repo/Reverse Repo and
Bank Fixed Deposits may not be included in the numerator. 1.2.15
For the purpose of the prudential limits prescribed in the guidelines,
the denominator viz., 'non-SLR investments', would include investment under the
following four categories in Schedule 8 to the balance sheet viz., 'shares', 'bonds
& debentures', 'subsidiaries/joint ventures' and 'others'. 1.2.16
Banks whose investment in unlisted non-SLR securities are within the
prudential limit of 10 per cent of its total non-SLR securities as on March 31,
of the previous year may make fresh investment in such securities and up to the
prudential limits. Role of Boards
1.2.17 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 investment in non-SLR
securities. 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. Banks should also put in place appropriate systems to ensure that investment
in privately placed instruments is made in accordance with the systems and procedures
prescribed under respective bank’s investment policy. 1.2.18
Boards of banks should review the following aspects of non-SLR investment
at least at quarterly intervals: a) Total business (investment
and divestment) during the reporting period. b) Compliance
with the prudential limits prescribed by the Board for non-SLR investment. c)
Compliance with the prudential guidelines issued by RBI on non-SLR securities. d)
Rating migration of the issuers/ issues held in the bank’s books and consequent
diminution in the portfolio quality. e) Extent of non-performing
investments in the non-SLR category. Disclosures
1.2.19 In order to help in the creation of a central database
on private placement of debt, a copy of all offer documents should be filed with
the Credit Information Bureau (India) Ltd. (CIBIL) by the investing banks. Further,
any default relating to interest/ instalment in respect of any privately placed
debt should also be reported to CIBIL by the investing banks along with a copy
of the offer document. 1.2.20 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 Annexure V. Trading
and settlement in debt securities 1.2.21 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 and unlisted debt securities are reported
on the NDS and settled through the CCIL from a date to be notified by RBI. Limits
on Banks' Exposure to Capital Markets A. Solo Basis The
aggregate exposure of a bank to the capital markets in all forms (both fund based
and non-fund based) should not exceed 40 per cent of its net worth as on March
31 of the previous year. Within this overall ceiling, the bank’s direct
investment in shares, convertible bonds / debentures, units of equity-oriented
mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered
and unregistered] should not exceed 20 per cent of its net worth. B
Consolidated Basis The aggregate exposure of a consolidated bank
to capital markets (both fund based and non-fund based) should not exceed 40 per
cent of its consolidated net worth as on March
31 of the previous year. Within this overall ceiling, the aggregate direct exposure
by way of the consolidated bank’s investment in shares, convertible bonds
/ debentures, units of equity-oriented mutual funds and all exposures to Venture
Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per
cent of its consolidated net worth. The above-mentioned ceilings are the
maximum permissible and a bank’s Board of Directors is free to adopt a lower
ceiling for the bank, keeping in view its overall risk profile and corporate strategy. 1.3
General 1.3.1 Reconciliation of
holdings of Govt. securities – Audit Certificate Banks
should furnish a ‘Statement of the Reconciliation of Bank's
Investments (held in own Investment account, as also under PMS)’, as at
the end of every accounting year duly certified by the bank's auditors. The statement
should reach the Regional Office of the DBS, RBI, under whose jurisdiction the
bank’s head office is located within one month from the close of the accounting
year. Banks in the letters of appointment, issued to their external auditors,
may suitably include the aforementioned requirement of reconciliation. The format
for the statement and the instructions for compiling thereto are given in Annexure
VI. 1.3.2 Transactions in securities
- Custodial functions While exercising the custodial functions
on behalf of their merchant banking subsidiaries, these functions should be subject
to the same procedures and safeguards as would be applicable to other constituents.
Accordingly, full particulars should be available with the subsidiaries of banks
of the manner in which the transactions have been executed. Banks should also
issue suitable instructions in this regard to the department/office undertaking
the custodial functions on behalf of their subsidiaries. 1.3.3
Portfolio Management on behalf of clients i) The
general powers vested in banks to operate PMS and similar schemes have been withdrawn.
No bank should, therefore, restart or introduce any new PMS or similar scheme
in future without obtaining specific prior approval of the RBI. However, bank-sponsored
NBFCs are allowed to offer discretionary PMS to their clients, on a case-to-case
basis. Applications in this regard should be submitted to the Department of Banking
Operations and Development (DBOD), RBI, World Trade Centre, Mumbai – 400
005. ii) The following conditions are to be strictly observed
by the banks operating PMS or similar scheme with the specific prior approval
of RBI: (a) PMS should be entirely at the customer's
risk, without guaranteeing, either directly or indirectly, a pre-determined return.
(b) Funds should not be accepted for portfolio management
for a period less than one year. (c) Portfolio funds should
not be deployed for lending in call/notice money; inter-bank term deposits and
bills rediscounting markets and lending to/placement with corporate bodies. (d)
Banks should maintain client wise account/record of funds accepted for
management and investments made there against and the portfolio clients should
be entitled to get a statement of account. (e) Bank's own
investments and investments belonging to PMS clients should be kept distinct from
each other, and any transactions between the bank's investment account and client's
portfolio account should be strictly at market rates. (f) There
should be a clear functional separation of trading and back office functions relating
to banks’ own investment accounts and PMS clients' accounts. iii)
PMS clients' accounts should be subjected by banks to a separate audit
by external auditors as covered in paragraph 1.2.5 (i) (a). iv)
Banks should note that violation of RBI's instructions will be viewed
seriously and will invite deterrent action against the banks, which will include
raising of reserve requirements, withdrawal of facility of refinance from the
RBI and denial of access to money markets, apart from prohibition from undertaking
PMS activity. v) Further, the aforesaid instructions will
apply, mutatis mutandis, to the subsidiaries of banks except where they
are contrary to specific regulations of the RBI or SEBI, governing their operations. vi)
Banks / merchant banking subsidiaries of banks operating PMS or similar
scheme with the specific prior approval of the RBI are also required to comply
with the guidelines contained in the SEBI (Portfolio Managers) Rules and Regulations,
1993 and those issued from time to time. 1.3.4
Investment Portfolio of bank - transactions in Government Securities In
the light of fraudulent transactions in the guise of Government securities, transactions
in physical format by a few co-operative banks with the help of some broker entities,
it has been decided to accelerate the measures for further reducing the scope
of trading in physical forms. These measures are as under: (i) For
banks, which do not have SGL account with RBI, only one gilt account can be opened. (ii)
In case the gilt accounts are opened with a scheduled commercial bank,
the account holder has to open a designated funds account (for all gilt account
related transactions) with the same bank. (iii) The entities
maintaining the gilt / designated funds accounts will be required to ensure availability
of clear funds in the designated funds accounts for purchases and of sufficient
securities in the gilt account for sales before putting through the transactions. (iv)
No transactions by the bank should be undertaken in physical form with
any broker. (v) Banks should ensure that brokers approved
for transacting in Government securities are registered with the debt market segment
of NSE/BSE/OTCEI. 2. 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 Maturity
i). 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 investments
The 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 above Or The 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 year And
the bank has a significant stake i.e.10% or more in the issue
And the 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. 3.
Valuation 3.1 Held to Maturity
i) Investments classified under HTM need not be marked to
market and will be carried at acquisition cost, unless it is more than the face
value, in which case the premium should be amortised over the period remaining
to maturity. The banks should reflect the amortised amount in ‘Schedule
13 – Interest Earned : Item II – Income on Investments’, as
a deduction. However, the deduction need not be disclosed separately. The book
value of the security should continue to be reduced to the extent of the amount
amortised during the relevant accounting period. 2 ii)
Banks should recognise any diminution, other than temporary, in the value of their
investments in subsidiaries/ joint ventures, which are included under HTM and
provide therefor. Such diminution should be determined and provided for each investment
individually. 3.2 Available for Sale
The individual scrips in the Available for Sale category will be marked to
market at quarterly or at more frequent intervals. Securities under this category
shall be valued scrip-wise and depreciation/ appreciation shall be aggregated
for each classification referred to in item 2(i) above. Net depreciation, if any,
shall be provided for. Net appreciation, if any, should be ignored. Net depreciation
required to be provided for in any one classification should not be reduced on
account of net appreciation in any other classification. The book value of the
individual securities would not undergo any change after the marking of market.
3.3 Held for Trading The individual
scrips in the Held for Trading category will be marked to market at monthly or
at more frequent intervals and provided for as in the case of those in the Available
for Sale category. Consequently, the book value of the individual securities in
this category would also not undergo any change after marking to market. 2
Please refer to the Mailbox clarification dated July 11, 2007. 3.4
Investment Fluctuation Reserve (i) With a
view to building up of adequate reserves to guard against any possible reversal
of interest rate environment in future due to unexpected developments, banks were
advised to build up Investment Fluctuation Reserve (IFR) of a minimum 5 per cent
of the investment portfolio within a period of 5 years. (ii) To
ensure smooth transition to Basel II norms, banks were advised in June 24, 2004
to maintain capital charge for market risk in a phased manner over a two year
period, as under: (a) In respect of securities included in the HFT category,
open gold position limit, open foreign exchange position limit, trading positions
in derivatives and derivatives entered into for hedging trading book exposures
by March 31, 2005, and (b) In respect of securities included in the AFS
category by March 31, 2006. (iii) With a view to encourage
banks for early compliance with the guidelines for maintenance of capital charge
for market risks, it was advised in April 2005 that banks which have maintained
capital of at least 9 per cent of the risk weighted assets for both credit risk
and market risks for both HFT (items as indicated at (a) above) and AFS category
may treat the balance in excess of 5 per cent of securities included under HFT
and AFS categories, in the IFR, as Tier I capital. Banks satisfying the above
were allowed to transfer the amount in excess of the said 5 per cent in the IFR
to Statutory Reserve. (iv) Banks were advised in October
2005 that, if they have maintained capital of at least 9 per cent of the risk
weighted assets for both credit risk and market risks for both HFT (items as indicated
at (a) above) and AFS category as on March 31, 2006, they would be permitted to
treat the entire balance in the IFR as Tier I capital. For this purpose, banks
may transfer the balance in the Investment Fluctuation Reserve ‘below the
line’ in the Profit and Loss Appropriation Account to Statutory Reserve,
General Reserve or balance of Profit & Loss Account. Investment
Reserve Account (IRA) (v) In the event, provisions
created on account of depreciation in the ‘AFS’ or ‘HFT’
categories are found to be in excess of the required amount in any year, the excess
should be credited to the Profit & Loss account and an equivalent amount (net
of taxes, if any and net of transfer to Statutory Reserves as applicable to such
excess provision) should be appropriated to an IRA Account in Schedule 2 –
“Reserves & Surplus” under the head “Revenue and other Reserves”,
and would be eligible for inclusion under Tier-II within the overall ceiling of
1.25 per cent of total Risk Weighted Assets prescribed for General Provisions/
Loss Reserves. - Banks may utilise IRA as follows:
The provisions
required to be created on account of depreciation in the AFS and HFT categories
should be debited to the P&L Account and an equivalent amount (net of tax
benefit, if any, and net of consequent reduction in the transfer to Statutory
Reserve), may be transferred from the IRA to the P&L Account. Illustratively,
banks may draw down from the IRA to the extent of provision made during the year
towards depreciation in investment in AFS and HFT categories (net of taxes, if
any, and net of transfer to Statutory Reserves as applicable to such excess provision).
In other words, a bank which pays a tax of 30% and should appropriate 25% of the
net profits to Statutory Reserves, can draw down Rs.52.50 from
the IRA, if the provision made for depreciation in investments included in the
AFS and HFT categories is Rs.100. (vii) The amounts debited
to the P&L Account for provision should be debited under the head ‘Expenditure
- Provisions & Contingencies’. The amount transferred from the IRA to
the P&L Account, should be shown as ‘below the line’ item in the
Profit and Loss Appropriation Account, after determining the profit for the year.
Provision towards any erosion in the value of an asset is an item of charge on
the profit and loss account, and hence should appear in that account before arriving
at the profit for the accounting period. Adoption of the following would not only
be adoption of a wrong accounting principle but would, also result in a wrong
statement of the profit for the accounting period: a)the
provision is allowed to be adjusted directly against an item of Reserve without
being shown in the profit and loss account, OR (b)
a bank is allowed to draw down from the IRA before arriving at the profit for
the accounting period (i.e., above the line), OR (c)
a bank is allowed to make provisions for depreciation on investment as a below
the line item, after arriving at the profit for the period, Hence none of the
above options are permissible. (viii) In terms of our
guidelines on payment of dividend by banks, dividends should be payable only out
of current year's profit. The amount drawn down from the IRA will, therefore,
not be available to a bank for payment of dividend among the shareholders. However,
the balance in the IRA transferred ‘below the line’ in the Profit
and Loss Appropriation Account to Statutory Reserve, General Reserve or balance
of Profit & Loss Account would be eligible to be reckoned as Tier I capital. 3.5
Market value The ‘market value’ for the purpose
of periodical valuation of investments included in the AFS and HFT would be the
market price of the scrip as available from the trades/ quotes on the stock exchanges,
SGL account transactions, price list of RBI, prices declared by Primary Dealers
Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives
Association of India (FIMMDA) periodically. In respect of unquoted securities,
the procedure as detailed below should be adopted. 3.6
Unquoted SLR securities 3.6.1 Central
Government Securities i) Banks should value
the unquoted Central Government securities on the basis of the prices/ YTM rates
put out by the PDAI/ FIMMDA at periodical intervals. ii)
The 6.00 per cent Capital Indexed Bonds may be valued at “cost”, as
defined in circular DBOD.No.BC.8/12.02.001/ 97-98 dated January 22, 1998 and BC.18/12.02.001/
2000-2001 dated August 16, 2000. iii) Treasury Bills should
be valued at carrying cost. 3.6.2 State Government
Securities State Government securities will be valued applying
the YTM method by marking it up by 25 basis points above the yields of the Central
Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically. 3.6.3
Other ‘approved’ Securities Other approved securities
will be valued applying the YTM method by marking it up by 25 basis points above
the yields of the Central Government Securities of equivalent maturity put out
by PDAI/ FIMMDA periodically. 3.7 Unquoted Non-SLR
securities 3.7.1 Debentures/ Bonds
All debentures/ bonds other than debentures/bonds, which are in the nature
of advance, should be valued on the YTM basis. Such debentures/ bonds may be of
different companies having different ratings. These will be valued with appropriate
mark-up over the YTM rates for Central Government securities as put out by PDAI/
FIMMDA periodically. The mark-up will be graded according to the ratings assigned
to the debentures/ bonds by the rating agencies subject to the following: - (a)
The rate used for the YTM for rated debentures/ bonds should be at least 50 basis
points above the rate applicable to a Government of India loan of equivalent maturity.
NOTE: The special securities, which are directly
issued by Government of India to the beneficiary entities, which do not carry
SLR status, may be valued at a spread of 25 basis points above the corresponding
yield on Government of India securities, with effect from the financial year 2008
- 09. At present, such special securities comprise: Oil Bonds, Fertiliser Bonds,
bonds issued to the State Bank of India (during the recent rights issue), Unit
Trust of India, Industrial Finance Corporation of India Ltd., Food Corporation
of India, Industrial Investment Bank of India Ltd., the erstwhile Industrial Development
Bank of India and the erstwhile Shipping Development Finance Corporation.3 (b)
The rate used for the YTM for unrated debentures/ bonds should not be
less than the rate applicable to rated debentures/ bonds of equivalent maturity.
The mark-up for the unrated debentures/ bonds should appropriately reflect the
credit risk borne by the bank. (c) Where the debenture/
bonds is quoted and there have been transactions within 15 days prior to the valuation
date, the value adopted should not be higher than the rate at which the transaction
is recorded on the stock exchange. 3 Please refer to circular DBOD.No.BP.BC.86/21.04.141/200708
dated May 22, 2008 3.7.2 Zero coupon bonds (ZCBs)
ZCBs should be shown in the books at carrying cost, i.e., acquisition cost
plus discount accrued at the rate prevailing at the time of acquisition, which
may be marked to market with reference to the market value. In the absence of
market value, the ZCBs may be marked to market with reference to the present value
of the ZCB. The present value of the ZCBs may be calculated by discounting the
face value using the ‘Zero Coupon Yield Curve’, with appropriate mark
up as per the zero coupon spreads put out by FIMMDA periodically. In case the
bank is still carrying the ZCBs at acquisition cost, the discount accrued on the
instrument should be notionally added to the book value of the scrip, before marking
it to market. 3.7.3 Preference Shares
The valuation of preference shares should be on YTM basis. The preference
shares will be issued by companies with different ratings. These will be valued
with appropriate mark-up over the YTM rates for Central Government securities
put out by the PDAI/FIMMDA periodically. The mark-up will be graded according
to the ratings assigned to the preference shares by the rating agencies subject
to the following: a) The YTM rate should not be lower
than the coupon rate/ YTM for a GOI loan of equivalent maturity. b)
The rate used for the YTM for unrated preference shares should not be
less than the rate applicable to rated preference shares of equivalent maturity.
The mark-up for the unrated preference shares should appropriately reflect the
credit risk borne by the bank. c) Investments in preference
shares as part of the project finance may be valued at par for a period of two
years after commencement of production or five years after subscription whichever
is earlier. d) Where investment in preference shares is
as part of rehabilitation, the YTM rate should not be lower than 1.5% above the
coupon rate/ YTM for GOI loan of equivalent maturity. e) Where
preference dividends are in arrears, no credit should be taken for accrued dividends
and the value determined on YTM should be discounted by at least 15% if arrears
are for one year, and more if arrears are for more than one year. The depreciation/provision
requirement arrived at in the above manner in respect of non-performing shares
where dividends are in arrears shall not be allowed to be set-off against appreciation
on other performing preference shares. f) The preference
share should not be valued above its redemption value. g) When
a preference share has been traded on stock exchange within 15 days prior to the
valuation date, the value should not be higher than the price at which the share
was traded. 3.7.4 Equity Shares
The equity shares in the bank's portfolio should be marked to market preferably
on a daily basis, but at least on a weekly basis. Equity shares for which current
quotations are not available or where the shares are not quoted on the stock exchanges,
should be valued at break-up value (without considering ‘revaluation reserves’,
if any) which is to be ascertained from the company’s latest balance sheet
(which should not be more than one year prior to the date of valuation). In case
the latest balance sheet is not available the shares are to be valued at Re.1
per company. 3.7.5 Mutual Funds Units (MF Units)
Investment in quoted MF Units should be valued as per Stock Exchange quotations.
Investment in un-quoted MF Units is to be valued on the basis of the latest re-purchase
price declared by the MF in respect of each particular Scheme. In case of funds
with a lock-in period, where repurchase price/ market quote is not available,
Units could be valued at Net Asset Value (NAV). If NAV is not available, then
these could be valued at cost, till the end of the lock-in period. Wherever the
re-purchase price is not available, the Units could be valued at the NAV of the
respective scheme. 3.7.6 Commercial Paper
Commercial paper should be valued at the carrying cost. 3.7.7
Investments in Regional Rural Banks (RRBs) Investment in
RRBs is to be valued at carrying cost (i.e. book value) on a consistent basis. 3.8.
Investment in securities issued by SC/RC When banks / FIs invest
in the SRs / Pass-Through Certificates (PTCs) issued by SCs / RCs, in respect
of the financial assets sold by them to the SCs / RCs, the sale shall be recognised
in books of the banks / FIs at the lower of: - the redemption
value of the SRs /PTCs, and
- the net book value (NBV) (i.e. Book
value less provisions held), of the financial asset.
The above investment
should be carried in the books of the bank / FI at the price as determined above
until its sale or realisation, and on such sale or realisation, the loss or gain
must be dealt with as under: (i) if the sale to SC /RC is
at a price below the NBV, the shortfall should be debited to the profit and loss
account of that year. (ii) If the sale is for a value
higher than the NBV, the excess provision will not be reversed but will be utilised
to meet the shortfall / loss on account of sale of other financial assets to SC
/ RC. All instruments received by banks / FIs from SC / RC as sale consideration
for financial assets sold to them and also other instruments issued by SC / RC
in which banks / FIs invest will be in the nature of non-SLR securities. Accordingly,
the valuation, classification and other norms applicable to investment in non-SLR
instruments prescribed by RBI from time to time would be applicable to bank’s
/ FI’s investment in debentures / bonds / security receipts / PTCs issued
by SC / RC. However, if any of the above instruments issued by SC / RC is limited
to the actual realisation of the financial assets assigned to the instruments
in the concerned scheme the bank / FI shall reckon the Net Asset Value (NAV),
obtained from SC / RC from time to time, for valuation of such investments. 3.9.
Valuation and classification of banks’ investment in VCFs 3.9.1
The quoted equity shares / bonds/ units of VCFs in the bank's portfolio
should be held under AFS and marked to market preferably on a daily basis, but
at least on a weekly basis, in line with valuation norms for other equity shares
as per existing instructions. 3.9.2 Banks’ investments
in unquoted shares/bonds/units of VCFs made after August 23, 2006 (i.e issuance
of guidelines on valuation, classification of investments in VCFs) will be classified
under HTM for initial period of three years and will be valued at cost during
this period. For the investments made before issuance of these guidelines, the
classification would be done as per the existing norms. 3.9.3 For
this purpose, the period of three years will be reckoned separately for each disbursement
made by the bank to VCF as and when the committed capital is called up. However,
to ensure conformity with the existing norms for transferring securities from
HTM, transfer of all securities which have completed three years as mentioned
above will be effected at the beginning of the next accounting year in one lot
to coincide with the annual transfer of investments from HTM category. 3.9.4
After three years, the unquoted units/shares/bonds should be transferred
to AFS category and valued as under: i) Units: In the
case of investments in the form of units, the valuation will be done at the NAV
shown by the VCF in its financial statements. Depreciation, if any, on the units
based on NAV has to be provided at the time of shifting the investments to AFS
category from HTM category as also on subsequent valuations which should be done
at quarterly or more frequent intervals based on the financial statements received
from the VCF. At least once in a year, the units should be valued based on the
audited results. However, if the audited balance sheet/ financial statements showing
NAV figures are not available continuously for more than 18 months as on the date
of valuation, the investments are to be valued at Rupee 1.00 per VCF. ii)
Equity: In the case of investments in the form of shares, the valuation
can be done at the required frequency based on the break-up value (without considering
‘revaluation reserves’, if any) which is to be ascertained from the
company’s (VCF’s) latest balance sheet (which should not be more than
18 months prior to the date of valuation). Depreciation, if any on the shares
has to be provided at the time of shifting the investments to AFS category as
also on subsequent valuations which should be done at quarterly or more frequent
intervals. If the latest balance sheet available is more than 18 months old, the
shares are to be valued at Rupee.1.00 per company. (iii) Bonds:
The investment in the bonds of VCFs, if any, should be valued as per
prudential norms for classification, valuation and operation of investment port-
folio by banks issued by RBI from time to time. 3.9.5 Valuation
norms on conversion of outstanding (a) Equity, debentures and
other financial instruments acquired by way of conversion of outstanding principal
and / or interest should be classified in the AFS category, and valued in accordance
with the extant instructions on valuation of banks' investment portfolio, except
to the extent that (a) equity may be valued as per market value, if quoted, (b)
in cases, where equity is not quoted, valuation may be at breakup value in respect
of standard assets and in respect of substandard / doubtful assets, equity may
be initially valued at Re1 and at breakup value after restoration / up gradation
to standard category. 3.10 Non-Performing Investments
(NPI) 3.10.1 In respect of securities included
in any of the three categories where interest/ principal is in arrears, the banks
should not reckon income on the securities and should also make appropriate provisions
for the depreciation in the value of the investment. The banks should not set-off
the depreciation requirement in respect of these non-performing securities against
the appreciation in respect of other performing securities. 3.10.2
An NPI, similar to a non performing advance (NPA), is one where : (i)
Interest/ instalment (including maturity proceeds) is due and remains
unpaid for more than 90 days. (ii) The above would apply
mutatis-mutandis to preference shares where the fixed dividend is not paid. (iii)
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 in accordance with the instructions contained in paragraph
28 of the Annex to the circular DBOD.BP.BC.32/ 21.04.048/ 2000-01 dated October
16, 2000, those equity shares would also be reckoned as NPI. (iv)
If any credit facility availed by the issuer is NPA in the books of the
bank, investment in any of the securities, including preference shares issued
by the same issuer would also be treated as NPI and vice versa. However, if only
the preference shares are classified as NPI, the investment in any of the other
performing securities issued by the same issuer may not be classified as NPI and
any performing credit facilities granted to that borrower need not be treated
as NPA. (v) The investments in debentures
/ bonds, which are deemed to be in the nature of advance would also be subjected
to NPI norms as applicable to investments. (vi) In case
of conversion of principal and / or interest into equity, debentures, bonds, etc.,
such instruments should be treated as NPA abinitio in the same asset classification
category as the loan if the loan's classification is substandard or doubtful on
implementation of the restructuring package and provision should be made as per
the norms. 3.10.3 State Government
guaranteed investments For the year ending March 31, 2005, investment
in State Government guaranteed securities would attract prudential norms for identification
of NPI and provisioning, if interest and/or principal or any other amount due
to the bank remains overdue for more than 180 days. With effect from the year
ending March 31, 2006, investment in State Government guaranteed securities, including
those in the nature of ‘deemed advance’, will attract prudential norms
for identification of non- performing investments and provisioning, when interest/
instalment of principal (including maturity proceeds) or any other amount due
to the bank remains unpaid for more than 90 days. 4.
Uniform accounting for Repo / Reverse Repo transactions.
4.1 In order to ensure uniform accounting treatment for accounting repo
/reverse repo transactions and to impart an element of transparency, uniform accounting
principles, have been laid down for repo / reverse repo transactions undertaken
by all the regulated entities. However, for the present, these norms would not
apply to repo / reverse repo transactions under the Liquidity Adjustment Facility
(LAF) with RBI. 4.2 The uniform accounting principles were
made applicable from the financial year 2003-04. The market participants
may undertake repos from any of the three categories of investments, viz., Held
for Trading, Available For Sale and Held to Maturity. 4.3 The
securities sold under repo (the entity selling referred to as “seller”)
are excluded from the Investment Account of the seller of securities and the securities
bought under reverse repo (the entity buying referred to as “buyer”)
are included in the Investment Account of the buyer of securities. Further, the
buyer can reckon the approved securities acquired under reverse repo transaction
for the purpose of Statutory Liquidity Ratio (SLR) during the period of the repo. 4.4
At present repo transactions are permitted in Central Government securities
including Treasury Bills and dated State Government securities. Since the buyer
of the securities will not hold it till maturity, the securities purchased under
reverse repo by banks should not be classified under Held to Maturity category.
The first leg of the repo should be contracted at prevailing market rates. Further,
the accrued interest received / paid in a repo / reverse repo transaction and
the clean price (i.e. total cash consideration less accrued interest) should be
accounted for separately and distinctly. 4. 5 The other
accounting principles to be followed while accounting for repos / reverse repos
will be as under: 4.5.1 Coupon In case the interest
payment date of the security offered under repo falls within the repo period,
the coupons received by the buyer of the security should be passed on to the seller
on the date of receipt as the cash consideration payable by the seller in the
second leg does not include any intervening cash flows. While the buyer will book
the coupon during the period of the repo , the seller will not accrue the coupon
during the period of the repo. In the case of discounted instruments like Treasury
Bills, since there is no coupon, the seller will continue to accrue the discount
at the original discount rate during the period of the repo. The buyer will not
therefore accrue the discount during the period of the repo. 4.5.2
Repo Interest Income / Expenditure After the second leg of the
repo / reverse repo transaction is over, (a) the difference
in the clean price of the security between the first leg and the second leg should
be reckoned as Repo Interest Income / Expenditure in the books of the buyer /
seller respectively; (b) the difference between the accrued
interest paid between the two legs of the transaction should be shown as Repo
Interest Income/ Expenditure account, as the case may be; and (c)
the balance outstanding in the Repo interest Income / Expenditure account should
be transferred to the Profit and Loss account as an income or an expenditure. As
regards repo / reverse repo transactions outstanding on the balance sheet date,
only the accrued income / expenditure till the balance sheet date should be taken
to the Profit and Loss account. Any repo income / expenditure for the subsequent
period in respect of the outstanding transactions should be reckoned for the next
accounting period. 4.5.3 Marking to Market The
buyer will mark to market the securities acquired under reverse repo transactions
as per the investment classification of the security. To illustrate, for banks,
in case the securities acquired under reverse repo transactions have been classified
under Available for Sale category, then the mark to market valuation for such
securities should be done at least once a quarter. For entities that do not follow
any investment classification norms, the valuation for securities acquired under
reverse repo transactions may be in accordance with the valuation norms followed
by them in respect of securities of similar nature. In respect of the repo
transactions outstanding as on the balance sheet date (a) the
buyer will mark to market the securities on the balance sheet date and will account
for the same as laid down in the extant valuation guidelines issued by the respective
regulatory departments of RBI. (b) the seller will provide
for the price difference in the Profit & Loss account and show this difference
under “Other Assets” in the balance sheet if the sale price of the
security offered under repo is lower than the book value. (c) the
seller will ignore the price difference for the purpose of Profit & Loss account
but show the difference under “Other Liabilities” in the Balance Sheet,
if the sale price of the security offered under repo is higher than the book value;
and (d) similarly the accrued interest paid / received
in the repo / reverse repo transactions outstanding on balance sheet dates should
be shown as "Other Assets" or "Other Liabilities" in the balance
sheet. 4.5.4 Book value on re-purchase The seller
shall debit the repo account with the original book value (as existing in the
books on the date of the first leg) on buying back the securities in the second
leg. 4.5.5 Disclosure The disclosures to be made
by banks in the “Notes on Accounts’ to the Balance Sheet is given
in Annexure VII. 4.5.6 Accounting methodology
The accounting methodology to be followed is given below and illustrations
are furnished in Annexure VIII. While market participants, having
different accounting systems, may use accounting heads different from those used
in the illustration, there should not be any deviation from the accounting principles
enunciated above. Further, to obviate disputes arising out of repo transactions,
the participants may consider entering into bilateral Master Repo Agreement as
per the documentation finalized by FIMMDA. 4.5.7 Recommended
Accounting Methodology for Uniform Accounting of Repo / Reverse Repo transactions a)
The following accounts may be opened, viz. (i) Repo Account, (ii) Repo Price Adjustment
Account, (iii) Repo Interest Adjustment Account, (iv) Repo Interest Expenditure
Account, (v) Repo Interest Income Account, (vi) Reverse Repo Account, (vii) Reverse
Repo Price Adjustment Account, and (viii) Reverse Repo Interest Adjustment Account. b)
The securities sold/ purchased under repo should be accounted for as an outright
sale / purchase. c) The securities should enter and exit
the books at the same book value. For operational ease, the weighted average cost
method whereby the investment is carried in the books at their weighted average
cost, may be adopted. Repo d)
In a repo transaction, the securities should be sold in the first leg at market
related prices and re-purchased in the second leg at the derived price. The sale
and repurchase should be accounted in the Repo Account. e)
The balances in the Repo Account should be netted from the bank's Investment Account
for balance sheet purposes. f) The difference between
the market price and the book value in the first leg of the repo should be booked
in Repo Price Adjustment Account. Similarly the difference between the derived
price and the book value in the second leg of the repo should be booked in the
Repo Price Adjustment Account. Reverse repo g)
In a reverse repo transaction, the securities should be purchased in the first
leg at prevailing market prices and sold in the second leg at the derived price.
The purchase and sale should be accounted for in the Reverse Repo Account. h)
The balances in the Reverse Repo Account should be part of the Investment Account
for balance sheet purposes and can be reckoned for SLR purposes if the securities
acquired under reverse repo transactions are approved securities. i)
The security purchased in a reverse repo will enter the books at the market price
(excluding broken period interest). The difference between the derived price and
the book value in the second leg of the reverse repo should be booked in the Reverse
Repo Price Adjustment Account. Other aspects relating to Repo / Reverse
Repo j) In case the interest payment date
of the security offered under repo falls within the repo period, the coupons received
by the buyer of the security should be passed on to the seller on the date of
receipt as the cash consideration payable by the seller in the second leg does
not include any intervening cash flows. k) The difference
between the amounts booked in the first and second legs in the Repo / Reverse
Repo Price Adjustment Account should be transferred to the Repo Interest Expenditure
Account or Repo Interest Income Account, as the case may be. l)
The broken period interest accrued in the first and second legs will be booked
in Repo Interest Adjustment Account or Reverse Repo Interest Adjustment Account,
as the case may be. Consequently the difference between the amounts booked in
this account in the first and second legs should be transferred to the Repo Interest
Expenditure Account or Repo Interest Income Account, as the case may be. m)
At the end of the accounting period the, for outstanding repos, the balances in
the Repo / Reverse Repo Price Adjustment Account and Repo / Reverse repo Interest
Adjustment account should be reflected either under item VI - 'Others' under Schedule
11 - 'Other Assets' or under item IV 'Others (including Provisions)' under Schedule
5 - 'Other Liabilities and Provisions' in the Balance Sheet, as the case may be. n)
Since the debit balances in the Repo Price Adjustment Account at the end of the
accounting period represent losses not provided for in respect of securities offered
in outstanding repo transactions, it will be necessary to make a provision therefor
in the Profit & Loss Account. o) To reflect the accrual
of interest in respect of the outstanding repo/ reverse repo transactions at the
end of the accounting period, appropriate entries should be passed in the Profit
and Loss account to reflect Repo Interest Income / Expenditure in the books of
the buyer / seller respectively and the same should be debited / credited as an
income / expenditure accrued but not due. Such entries passed should be reversed
on the first working day of the next accounting period. p)
In respect of repos in interest bearing (coupon) instruments, the buyer would
accrue interest during the period of repo. In respect of repos in discount instruments
like Treasury Bills, the seller would accrue discount during the period of repo
based on the original yield at the time of acquisition. q)
At the end of the accounting period the debit balances (excluding balances for
repos which are still outstanding) in the Repo Interest Adjustment Account and
Reverse Repo Interest Adjustment Account should be transferred to the Repo Interest
Expenditure Account and the credit balances (excluding balances for repos which
are still outstanding) in the Repo Interest Adjustment Account and Reverse Repo
Interest Adjustment Account should be transferred to the Repo Interest Income
Account. r) Similarly, at the end of accounting period,
the debit balances (excluding balances for repos which are still outstanding)
in the Repo / Reverse Repo Price Adjustment Account should be transferred to the
Repo Interest Expenditure Account and the credit balances (excluding balances
for repos which are still outstanding) in the Repo / Reverse Repo Price Adjustment
Account should be transferred to the Repo Interest Income Account. 5.
General 5.1 Income recognition
i) Banks may book income on accrual basis on securities
of corporate bodies/ public sector undertakings in respect of which the payment
of interest and repayment of principal have been guaranteed by the Central Government
or a State Government, provided interest is serviced regularly and as such is
not in arrears. ii) Banks may book income from dividend
on shares of corporate bodies on accrual basis provided dividend on the shares
has been declared by the corporate body in its Annual General Meeting and the
owner's right to receive payment is established. iii) Banks
may book income from Government securities and bonds and debentures of corporate
bodies on accrual basis, where interest rates on these instruments are pre-determined
and provided interest is serviced regularly and is not in arrears. iv)
Banks should book income from units of mutual funds on cash basis. 5.2
Broken Period Interest Banks should not capitalise the Broken
Period Interest paid to seller as part of cost, but treat it as an item of expenditure
under Profit and Loss Account in respect of investments in Government and other
approved securities. It is to be noted that the above accounting treatment does
not take into account taxation implications and hence the banks should comply
with the requirements of Income Tax Authorities in the manner prescribed by them.
5.3 Dematerialised Holding
Banks should settle the transactions in securities as notified by SEBI only through
depositories. After the commencement of mandatory trading in demat form, banks
would not be able to sell the shares of listed companies if they were held in
physical form. In order to extend the demat form of holding to other instruments
like bonds, debentures and equities, it was decided that, with effect from October
31, 2001, banks, FIs, PDs and SDs would be permitted to make fresh investments
and hold bonds and debentures, privately placed or otherwise, only in dematerialised
form. Outstanding investments in scrip forms would have to be converted into dematerialised
form by June 30, 2002. As regards equity instruments, banks were required to convert
all their equity holding in scrip form into dematerialised form by December 31,
2004. |