What changed
RBI withdrew the exemption from mark-to-market norms that RRBs enjoyed on their entire SLR securities portfolio up to FY 2012-13. Effective April 1, 2014, RRBs must classify all investments into three categories: Held to Maturity, Available for Sale, and Held for Trading. The HTM category is capped at 25% of total investments, but can exceed if excess SLR securities keep total HTM SLR securities within 24.5% of DTL.
What it means for you
RRBs will now face market volatility on their SLR portfolios, requiring periodic MTM valuation for AFS and HFT categories. This aligns RRBs with commercial bank norms, increasing transparency but potentially impacting profitability if bond yields rise. Banks must update investment policies and risk management frameworks to comply.
What you must do
- Classify entire investment portfolio into HTM, AFS, and HFT categories as on April 1, 2014, using book value.
- Ensure HTM category does not exceed 25% of total investments, or if exceeded, SLR securities in HTM must be ≤24.5% of DTL.
- Formulate or update Investment Policy with Board approval covering classification, shifting, valuation, and risk management.
- Conduct first MTM valuation for AFS and HFT categories as on April 1, 2014.
- Document procedures transparently for inspection and audit.
Who it affects
All Regional Rural Banks (RRBs), RRB Board of Directors, RRB investment and treasury teams, Statutory auditors of RRBs
What is the new HTM limit for RRBs?
HTM investments cannot exceed 25% of total investments. However, if the excess comprises SLR securities, the total SLR securities in HTM must not exceed 24.5% of the bank's demand and time liabilities (DTL) as on the last Friday of the second preceding fortnight.
When does the new MTM requirement take effect?
The revised guidelines apply from April 1, 2014. The first MTM valuation for securities in AFS and HFT categories must be done as on that date.
Do RRBs need a new investment policy?
Yes. RRBs must formulate an Investment Policy with Board approval that addresses classification, shifting, valuation, risk management, and ensures transparent, documented procedures.