What changed
RBI released FAQs to clarify the 2023 Directions on classification, valuation, and operation of banks' investment portfolios. Key clarifications cover when bonds with put options can be held in HTM, how to determine fair value at initial recognition, amortisation periods for securities with call/put options, and classification of securities received from conversion of NPA loans.
What it means for you
Banks now have clearer guidance on HTM eligibility for put-option bonds, reducing ambiguity in portfolio classification. The amortisation rule for perpetual debt up to the earliest call date aligns with market practice. The partial modification to clause 36(a)(v) clarifies that securities received from conversion of NPA loans shall be classified under HTM/AFS/FVTPL at initial recognition (when the loan is derecognised), not only upon upgradation to standard, impacting provisioning and balance sheet management.
What you must do
- Review HTM portfolios to ensure bonds with put options meet SPPI and hold-to-maturity intent, and document scenarios for put exercise.
- Update amortisation schedules for perpetual debt securities to amortise discount/premium up to the earliest call date.
- Adjust processes for securities received from NPA conversions to classify them only upon upgradation to standard as per IRACP norms.
- Train treasury and compliance teams on these FAQs to align with the updated Directions.
Who it affects
All commercial banks (excluding RRBs), Treasury departments, Risk management teams, Compliance and audit functions
Clause 36(a)(v) says converted securities are classified in the same category as the loan and provisioned accordingly. Does this mean classification under HTM, AFS, or FVTPL happens only upon upgradation?
In partial modification to clause 36(a)(v), it is clarified that equity shares, debentures, bonds, etc., received upon conversion of principal and/or interest shall be classified under HTM, AFS, or FVTPL (including HFT) only at initial recognition (i.e., when the loan is derecognised and the bond/equity, etc. is recognised), as per Chapter III of the Directions. Banks must note that the asset classification of such instruments shall be the same as the loan and provisions made accordingly as stated in clause 36(a)(v).