What changed
The existing September 2007 guidelines were reviewed based on bank representations. Key changes include: allowing investment in 'A' or equivalent rated Commercial Papers, debentures, bonds, and units of Debt/Money Market Mutual Funds; banning perpetual debt instruments and equity-oriented mutual funds; capping unlisted securities at 10% of total Non-SLR investments; requiring all fresh Non-SLR investments to be classified as HFT or AFS and marked to market; and mandating that secondary market transactions be done only with commercial banks or primary dealers.
What it means for you
UCBs now have a clearer, more restrictive framework for Non-SLR investments. The ban on perpetual debt and equity mutual funds reduces risk, but the 10% unlisted securities sub-limit and mandatory HFT/AFS classification increase compliance and market risk. Banks must review their investment policies, strengthen risk management, and ensure half-yearly board reviews of rating migrations and portfolio quality. The disclosure requirements will improve transparency in balance sheets.
What you must do
- Review and update your bank's investment policy to align with the new eligible instruments and restrictions.
- Ensure all fresh Non-SLR investments are classified as Held for Trading or Available for Sale and marked to market.
- Cap unlisted securities at 10% of total Non-SLR investments; if exceeded, stop further purchases.
- Disinvest existing holdings in equity-oriented mutual funds (including UTI) and shares of AIFIs, treating them as Non-SLR until sold.
- Conduct half-yearly board reviews of Non-SLR investment activity, compliance, rating migrations, and non-performing investments.
Who it affects
All Primary (Urban) Co-operative Banks, Treasury and investment departments of UCBs, Board of Directors of UCBs, Compliance and risk management teams
What is the prudential limit for Non-SLR investments?
Non-SLR investments are capped at 10% of the bank's total deposits as on March 31 of the previous year. This limit remains unchanged from earlier guidelines.
Can we invest in perpetual debt instruments or equity mutual funds?
No. Investment in perpetual debt instruments is not permitted. Also, investment in units of mutual funds other than Debt Mutual Funds and Money Market Mutual Funds is banned; existing holdings must be disinvested.
What are the counterparty restrictions for secondary market transactions?
All acquisition or sale of Non-SLR investments in the secondary market must be undertaken only with commercial banks or primary dealers as counterparties.