Source: Reserve Bank of India · RBI/DOR/2023-24/104 · issued 12 Sep 2023 · ~2 min read
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RBI/DOR/2023-24/104
DOR.MRG.36/21.04.141/2023-24
September 12, 2023
( Updated as on April 01, 2025 )
All Commercial Banks (excluding Regional Rural Banks)
Dear Sir / Madam,
Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023
The extant regulatory instructions on classification and valuation of investment portfolio by commercial banks, as contained in the Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2021 , are largely based on a framework introduced in October 2000 drawing upon the then prevailing global standards and best practices.
2. In view of the significant developments in the global standards on classification, measurement and valuation of investments, the linkages with the capital adequacy framework as well as progress in the domestic financial markets, a need was felt to review and update these norms. Pursuant to the announcement made in the Statement on Developmental and Regulatory Policies dated December 8, 2021 , a discussion paper on the subject was issued for public comments on January 14, 2022. Based on the inputs received, it has now been decided to put in place a revised regulatory framework for the investment portfolio.
3. The revised framework updates the regulatory guidelines with global standards and best practices while introducing a symmetric treatment of fair value gains and losses, a clearly identifiable trading book under Held for Trading (HFT), removing the 90-day ceiling on holding period under HFT, removal of ceilings on Held to Maturity and more detailed disclosures on the investment portfolio. Further, to facilitate smooth implementation, illustrative guidance has been developed on the revised framework and annexed to the Directions.
Applicability
4. The revised framework as detailed in the Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023 annexed hereto shall be applicable from April 1, 2024, to all Commercial Banks excluding Regional Rural Banks.
5. Reserve Bank of India is issuing these Directions in the exercise of its powers conferred under section 35A of the Banking Regulation Act, 1949, and all the powers enabling it on this behalf.
Yours faithfully,
(Usha Janakiraman)
Chief General Manager
RBI/2023-24/
DOR.MRG.37/21.04.141/2023-24
September 12, 2023
Reserve Bank of India - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks, Directions, 2023
Commercial banks are currently required to follow regulatory guidelines on classification and valuation of investment portfolio, which are based on framework issued in October 2000 drawing upon the then prevailing global standards and best practices. In view of the significant development in global financial reporting standards, the linkages with the capital adequacy framework as well as progress in the domestic financial markets, revised regulatory framework for the investment portfolio is being issued.
In exercise of the powers conferred under Section 35 A of the Banking Regulation Act, 1949 (hereinafter called the ‘BR Act’), the Reserve Bank of India (hereinafter called the ‘Reserve Bank’ or ‘RBI’), being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.
Chapter – I
Preliminary
1. Short title
These Directions shall be called the Reserve Bank of India (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023.
2. Effective Date
These Directions shall come into effect for accounting period commencing on or after April 1, 2024.
3. Applicability
These Directions shall be applicable to all banking companies 1 , corresponding new banks and State Bank of India as defined under subsections (c), (da) and (nc) of section 5 of the BR Act, 1949 (collectively referred to as ‘banks’ hereinafter).
4. Definitions
(a) In these Directions, unless the context states otherwise, the terms herein shall bear the meanings assigned to them below:
(i) “Active market” 2 is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
(ii) “Approved Securities” shall have the same meaning as defined in clause 3(a)(iii) of Reserve Bank of India Directions - 2021 on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), as amended from time to time.
(iii) “Associate” as defined in Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements (‘AS 23’) is an enterprise in which the investor has significant influence, and which is neither a subsidiary nor a joint venture of the investor.
Explanation: For the purpose of this definition, the expression “significant influence” is the power to participate in the financial and/ or operating policy decisions of the investee but not control over those policies. Significant influence is presumed if an investor holds, directly or indirectly through subsidiary/subsidiaries, 20 per cent or more of the voting power of the investee. Banks may refer to AS 23 for further guidance on the term ‘associate’.
(iv) “Carrying cost” in the context of zero-coupon discounted instruments such as Treasury Bills, Commercial Paper, Certificate of Deposits and Zero-Coupon Bonds is the acquisition cost adjusted for the discount accrued at the rate prevailing at the time of acquisition.
(v) “Corporate bonds and debentures” for the purpose of these Directions mean debt securities which create or acknowledge indebtedness, including (a) debentures (b) bonds (c) commercial papers (d) certificate of deposits and such other securities of a company, a multilateral financial institution (MFI) or a body corporate constituted by or under a Central Act or a State Act, whether constituting a charge on the assets of the company or body corporate or not, and includes convertible instruments and instruments of a perpetual nature, but does not include (a) debt securities issued by Central Government or a State Government, or such other persons as may be specified by the Reserve Bank, (b) security receipts and (c) securitisation notes.
(vi) “Current and Valid Credit Rating” for the purpose of determining rated security means a credit rating granted by a credit rating agency in India, registered with the Securities and Exchange Board of India (SEBI) and fulfilling the following conditions:
The credit rating letter and rating rationale from the credit rating agency shall preferably be part of the offer document.
The credit rating letter shall not be more than one month old and rating rationale shall not be more than one year old from the date of opening of issue.
In the case of secondary market acquisition, the credit rating of the issue shall be in force and confirmed from the monthly bulletin published by the respective credit rating agency.
Explanation: In the case of overseas investments, the rating used shall be of the international credit rating agencies specified for the purpose of risk weighting for capital adequacy 3 purposes.
(vii) “Day 1 Gain” is the difference between the fair value at initial recognition and acquisition cost where such fair value exceeds the acquisition cost.
(viii) “Day 1 Loss” is the difference between acquisition cost and the fair value at initial recognition where the acquisition cost exceeds such fair value.
(ix) “Derecognition” means the removal of a previously recognized financial instrument from a bank’s balance sheet.
(x) “Derivative” shall have the same meaning as assigned to it in section 45U(a) of the Reserve Bank of India Act, 1934 (‘RBI Act’), as amended from time to time.
(xi) “Discount” for the purposes of these Directions and in the context of debt securities that meet the solely payments of principal and interest (‘SPPI’) criteria shall mean the difference between the face value of a debt security and the amount at which that security has initially been recognised in the books.
(xii) “Exchange” means “Recognized stock exchange” and shall have the same meaning as defined in Section 2 (f) of Securities Contracts (Regulation) Act, 1956, as amended from time to time. In the case of overseas jurisdictions, it shall refer to an exchange which is recognised or authorised by the securities market regulator of that jurisdiction.
(xiii) “Fair value” for the purpose of these directions means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.
(xiv) “Financial asset” is any asset that is cash, the right to receive cash or another financial asset, or an equity instrument.
(xv) “Financial instrument” is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments.
(xvi) “Financial liability” is the contractual obligation to deliver cash or another financial asset.
(xvii) “Government security” shall have the same meaning as assigned to it in section 2(f) of the Government Securities Act, 2006.
(xviii) “Interest” for the purposes of determining eligibility under the solely payments of principal and interest (‘SPPI’) criteria consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.
(xix) “Joint Venture” as defined in Accounting Standard 27: Financial Reporting of Interests in Joint Ventures (‘AS 27’) is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity 4 .
(xx) “Level 1” in the context of inputs used for valuation of a financial instrument are those inputs which are quoted prices (unadjusted) in active markets for identical instruments that the bank can access at the measurement date. In reference to the valuation of an instrument, it refers to a valuation that is substantively based on Level 1 inputs and does not have any significant Level 2 or Level 3 inputs.
(xxi) “Level 2” in the context of inputs used for valuation of a financial instrument are those inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. In reference to the valuation of an instrument, it refers to a valuation that is based on Level 1 and Level 2 inputs and does not have any significant Level 3 inputs.
(xxii) “Level 3” in the context of inputs used for valuation of a financial instrument are unobservable inputs. In reference to the valuation of an instrument, it refers to a valuation in which there is a significant Level 3 input.
(xxiii) “Listed security” is a security which is listed on an exchange.
(xxiv) “Low Coupon Bonds” are bonds which carry very low coupons that are not market related and are redeemed at maturity with substantial premium.
(xxv) “Observable inputs” are inputs that are developed using market data, such as publicly available information about actual events or transactions.
(xxvi) ‘Other approved securities’ shall have the same meaning as defined under clause 3(xxiii) of the Reserve Bank of India Directions - 2021 on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), as amended from time to time.
(xxvii) “Premium” for the purposes of these Directions and in the context of debt securities that meet the solely payments of principal and interest (SPPI) criteria shall mean the difference between the amount at which a debt security has initially been recognised in the books and the face value of that security.
(xxviii) “Quoted Security” is a security for which market prices are available at exchanges, reporting platforms or trading platforms authorized by RBI / SEBI.
(xxix) “Principal market” for a financial instrument is the market with the greatest volume and level of activity for that financial instrument.
(xxx) “Rated Security” means a security which carries a current and valid credit rating.
(xxxi) “Reconstitution” means the reverse process of stripping, where the individual Separate Trading of Registered Interest and Principal of Securities (STRIPS) i.e., both coupon STRIPS and Principal STRIPS are reassembled to get back the original security, as defined in circular IDMD.1762/2009-10 dated October 16, 2009, on ‘Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS)’, as amended from time to time.
(xxxii) “Repo” and “Reverse Repo” shall have the same meaning as defined in Section 45U of RBI Act, 1934, as amended from time to time. For the purpose of these Directions, the word ‘repo’ is used to mean both ‘repo’ and ‘reverse repo’ with the appropriate meaning applied contextually.
(xxxiii) “Securities” shall have the same meaning as defined in Section 2(h) of Securities Contracts (Regulation) Act, 1956, as amended from time to time.
(xxxiv) “Securities and Exchange Board of India” or “SEBI” in the context of securities issued in India 5 refers to the Securities and Exchange Board of India established under the provisions of the Securities and Exchange Board of India Act, 1992.
(xxxv) “Security Receipts” shall have the same meaning as defined in Section 2(1)(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended from time to time.
(xxxvi) “Securitisation note” shall be as defined in Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 . It shall also include for the purpose of these directions, securitised debt instruments (SDIs) issued in terms of the Securities and Exchange Board of India (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008.
(xxxvii) “Short Sale” shall have the same meaning as defined in Short Sale (Reserve Bank) Directions, 2018 , as amended from time to time.
(xxxviii) “Statutory Liquidity Ratio (SLR) Securities” shall have the same meaning as defined in Reserve Bank of India Directions - 2021 on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), as amended from time to time.
(xxxix) “Statutory Reserve” refers to the reserve fund created and maintained under the provisions of section 17 of the B R Act, 1949.
(xl) “STRIPS” (Separate Trading of Registered Interest and Principal of Securities) means distinct, separate securities that are created from the cash flows of a Government security and shall consist of (i) Coupon STRIPS, where the single cash flow of the STRIP represents a coupon flow of the original security; and (ii) Principal STRIP, where the single cash flow of the STRIP represents the principal cash flow of the original security, as defined in circular IDMD.1762/2009-10 dated October 16, 2009 on ‘Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS)’, as amended from time to time.
(xli) “Stripping” means the process of separating the cash flows associated with a regular Government security i.e., each outstanding semi-annual coupon payment and the final principal payment into separate securities, as defined in circular on Government Securities - Separate Trading of Registered Interest and Principal of Securities (STRIPS) issued vide IDMD.1762/2009-10 dated October 16, 2009, as amended from time to time.
(xlii) “Subsidiary” as defined in Accounting Standard 21: Consolidated Financial Statements (AS 21) is an enterprise that is controlled by another enterprise (known as the parent).
Explanation: For the purpose of this definition, the expression “control” is:
the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or
control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.
Banks may refer to AS 21 for further guidance on the term ’subsidiary’.
(xliii) “Unrated securities” means securities which do not have a current and valid credit rating.
(xliv) “Unobservable inputs” are those inputs for which market data such as quoted prices, yield curves, bid-offer spreads, etc. are not available and are instead based on assumptions that market participants would use when pricing a financial instrument.
(xlv) “When, as and if issued” (commonly known as ‘when-issued’ (WI)) security means a security as referred to in When Issued Transactions (Reserve Bank) Directions, 2018 , as amended from time to time.
(b) All other expressions unless defined herein shall have the same meaning as have been assigned to them under the BR Act, the RBI Act, rules/regulations made thereunder, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be.
Chapter – II
General Guidelines
5. Investment Policy Framework
Banks shall undertake investment activities as per the terms and conditions specified in these Directions.
(a) Banks shall adopt a comprehensive investment policy duly approved by the Board of Directors.
(b) The investment policy shall, at the minimum, include:
The investment criteria and objectives to be achieved while undertaking investment transactions on their own investment account and on behalf of clients.
Securities in which investments can be made by the bank.
Derivatives in which the bank shall deal.
The authority to put through deals.
Procedure for obtaining the sanction of the appropriate authority and putting through deals.
Adherence to various prudential exposure limits.
Policy regarding dealings through brokers, systems for management of various risks, guidelines for valuation of the portfolio and the reporting systems.
(c) The investment policy shall be framed to ensure that transactions in securities and derivatives are conducted in accordance with sound and acceptable business practices.
(d) The investment policy shall lay down prudential limits for investment in securities including those on private placement basis, sub-limits for Public Sector Undertaking (‘PSU’) bonds, corporate bonds, guaranteed bonds, issuer ceiling, etc.
(e) There shall be proper risk management systems for making investment in corporate bonds which shall include entry-level minimum credit ratings/ quality standards and industry-wise, maturity-wise, duration-wise, issuer-wise, etc., limits to mitigate the adverse impact of concentration and liquidity risk.
(f) Investment policy shall cover in detail the procedure for investment in equities and the policy for managing associated risks. Banks shall also build an adequate expertise in equity research by establishing a dedicated equity research department, commensurate with the scale of their operations.
(g) The decision to make investment in equity shares, preference shares, convertible instruments and equity like products shall be taken by the Investment Committee set up by the bank's Board, which will be held accountable for all the investments made by the bank.
(h) Investment proposals shall be subjected to the same degree of credit risk analysis as any loan proposal.
(i) Banks shall refer to the list of defaulters obtained from Credit Information Companies and Central Repository of Information on Large Credits (CRILC) while taking investment decisions.
(j) Banks shall make their own internal credit analysis and credit rating even in respect of rated issues and shall not entirely rely on the ratings of external credit rating agencies. The appraisal shall be more stringent in respect of investments in instruments issued by non-borrower customers.
(k) Banks shall ensure robust internal credit rating systems which shall also include building up of a system of regular (quarterly or half-yearly) tracking of the financial position of the issuer to ensure continuous monitoring of the rating migration of the issuers/issues.
(l) Banks shall settle the transactions in securities and derivatives as per procedure prescribed by the concerned regulator.
(m) Banks shall hold their investments in securities, privately placed or otherwise, only in dematerialized form.
(n) Investment by offshore branches of Indian banks shall be in accordance with their Board approved policy on investments. Such policy shall, at the minimum, include risk perception associated with investments, minimum rating requirement, limits, approval process, host country regulations etc.
(o) The investment policy shall be suitably framed to also include Primary Dealer (PD) activities where such activities are carried out departmentally.
Further the PD business undertaken by the bank shall adhere to the instructions contained in Reserve Bank of India Master Direction - Operational Guidelines for Primary Dealers issued vide Master Direction IDMD.PDRD.01/03.64.00/2016-17 dated July 1, 2016 , as amended from time to time.
(p) These instructions on Investment Policy Framework in paragraph 5 (a) to (o) above shall be applicable mutatis mutandis, to the subsidiaries and mutual funds established by banks except to the extent they are contrary to or inconsistent with specific regulations of the Reserve Bank, SEBI, Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA) governing their operations.
(q) These Directions shall be read with the Directions on Prudential Regulation for Banks’ Investments and Portfolio Management Services contained in the Reserve Bank of India (Financial Services provided by Banks) Directions, 2016 as amended from time to time.
Chapter – III
Classification of Investments by Banks
6. Categorization of investments
(a) Banks shall classify their entire investment portfolio (except investments in their own subsidiaries, joint ventures and associates) 6 under three categories, viz., Held to Maturity (HTM), Available for Sale (AFS) and Fair Value through Profit and Loss (FVTPL). Held for Trading (HFT) shall be a separate investment sub-category within FVTPL. The category of the investment shall be decided by the bank before or at the time of acquisition and this decision shall be properly documented.
(b) Banks shall continue to present the investments in the Balance Sheet as set out in The Third Schedule to the BR Act (Form A, Schedule 8 - Investments) as under:
Government securities
Other approved securities
Shares
Debentures & Bonds
Subsidiaries and / or joint ventures
Others (to be specified)
6.1 HTM
(a) Securities that fulfil the following conditions shall be classified under HTM:
The security is acquired with the intention and objective of holding it to maturity, i.e., the financial assets are held with an objective to collect the contractual cash flows; and
the contractual terms of the security give rise to cash flows that are solely payments of principal 7 and interest on principal outstanding (‘SPPI criterion’) on specified dates.
(b) Notwithstanding the intent with which the following securities are acquired, they shall not meet the SPPI criteria and therefore shall not be eligible for classification either as HTM or AFS:
Instruments with compulsorily, optionally or contingently convertible features.
Instruments with contractual loss absorbency features such as those qualifying for Additional Tier 1 and Tier 2 under Basel III Capital Regulations.
Instruments whose coupons are not in the nature of interest as defined in Clause 4(a)(xviii) above.
Preference shares 8 and Equity 9 shares.
(c) Investments in the securitization notes, other than the equity tranche, shall be considered to meet the SPPI criteria if the tranche in which the investment is made meets all the following conditions:
The contractual terms of the tranche being assessed for classification (without looking through to the underlying pool of financial instruments) give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.
The underlying pool of financial instruments meet the SPPI criteria.
The credit risk of the tranche is equal to or lower than the credit risk of the combined underlying pool of assets.
6.2 AFS
(a) Securities that meet the following conditions shall be classified under AFS:
The security is acquired with an objective that is achieved by both collecting contractual cash flows and selling securities; and
the contractual terms of the security meet the ‘SPPI criterion’ as given in paragraph 6.1(a)(ii) above.
Provided that on initial recognition, a bank may make an irrevocable election to classify an equity instrument that is not held with the objective of trading (i.e., not held for any of the purposes listed in paragraph 4 of Annex I ) under AFS.
(b) AFS securities shall inter-alia include debt securities held for asset liability management (ALM) purposes that meet the SPPI criterion where the bank’s intent is flexible with respect to holding to maturity or selling before maturity.
6.3 FVTPL
(a) Securities that do not qualify for inclusion in HTM or AFS shall be classified under FVTPL. These shall inter-alia include:
Equity shares, other than (a) equity shares of subsidiaries, associates or joint ventures and (b) equity shares where, at initial recognition, the irrevocable option to classify at AFS has been exercised.
Investments in Mutual Funds, Alternative Investment Funds, Real Estate Investment Trusts, Infrastructure Investment Trusts, etc.
Investment in securitisation notes which represent the equity tranche of a securitisation transaction. Investments in senior and other subordinate tranches shall need to be reviewed for their compliance with SPPI criterion explained in clause 6.1(c) above.
Bonds, debentures, etc. where the payment is linked to the movement in a particular index such as an equity index rather than an interest rate benchmark.
Securities referred to in sub-clause 6.1(b), subject to the exception for equity referred to in sub-clause (i) above.
6.4 HFT
Banks shall create a separate sub-category called HFT within FVTPL. Banks shall comply with the requirements specified in Annex I for classifying investments under HFT.
6.5 Investments in Subsidiaries, Associates and Joint Ventures
All investments in subsidiaries, associates and joint ventures shall be held sui generis i.e., in a distinct category for such investments separate from the other investment categories (viz. HTM, AFS and FVTPL).
Chapter – IV
Initial recognition
7. All investments shall be measured at fair value on initial recognition. Unless facts and circumstances suggest that the fair value is materially different from the acquisition cost, it shall be presumed that the acquisition cost is the fair value. Situations where the presumption shall be tested include where:
The transaction is between related parties 10 .
The transaction is taking place under duress where one party is forced to accept the price in the transaction.
The transaction is done outside the principal market for that class of securities.
Other situations, where in the opinion of the supervisor, facts and circumstances warrant testing of the presumption.
8. In respect of government securities acquired through auction (including devolvement), switch operations and open market operations (OMO) conducted by the RBI, the price at which the security is allotted shall be the fair value for initial recognition purposes.
9. Where the securities are quoted or the fair value can be determined based on market observable inputs (such as yield curve, credit spread, etc.) any Day 1 gain/ loss shall be recognised in the Profit and Loss Account, under Schedule 14: ‘Other Income’ within the subhead ‘Profit on revaluation of investments’ or ‘Loss on revaluation of investments’, as the case may be.
10. Any Day 1 loss arising from Level 3 investments shall be recognised immediately.
11. Any Day 1 gains arising from Level 3 investments shall be deferred. In the case of debt instruments, the Day 1 gain shall be amortized on a straight-line basis up to the maturity date (or earliest call date for perpetual instruments), while for unquoted equity instruments, the gain shall be set aside as a liability until the security is listed or derecognised.
Chapter – V
Subsequent Measurement
12. HTM
(a) Securities held in HTM shall be carried at cost and shall not be marked to market (MTM) after initial recognition. However, they shall be subject to income recognition, asset classification and provisioning norms as specified in Chapter X of these Directions.
(b) Any discount or premium on the securities under HTM shall be amortised over the remaining life of the instrument. The amortised amount shall be reflected in the financial statements under item II ‘Income on Investments’ of Schedule 13: ‘Interest Earned’ with a contra in Schedule 8:’Investments’.
13. AFS
(a) The securities held in AFS shall be fair valued at least on a quarterly basis, if not more frequently. Any discount or premium on the acquisition of debt securities under AFS shall be amortised over the remaining life of the instrument. The amortised amount shall be reflected in the financial statements under item II ‘Income on Investments’ of Schedule 13: ‘Interest Earned’ with a contra in Schedule 8:’Investments’.
(b) The valuation gains and losses across all performing investments, irrespective of classification (i.e., Government securities, Other approved securities, Bonds and Debentures, etc.), held under AFS shall be aggregated. The net appreciation or depreciation 11 shall be directly credited or debited to a reserve named AFS-Reserve without routing through the Profit & Loss Account.
(c) Securities under AFS shall be subject to income recognition, asset classification and provisioning norms as specified in Chapter X of these Directions.
(d) The AFS-Reserve shall be reckoned as Common Equity Tier (CET) 1 subject to clause 28 of these Directions. The unrealised gains transferred to AFS-Reserve shall not be available for any distribution such as dividend and coupon on Additional Tier 1.
(e) Upon sale or maturity of a debt instrument in AFS category, the accumulated gain/ loss for that security in the AFS-Reserve shall be transferred from the AFS-Reserve and recognized in the Profit and Loss Account under item II Profit on sale of investments under Schedule 14-Other Income.
(f) In the case of equity instruments designated under AFS at the time of initial recognition, any gain or loss on sale of such investments shall not be transferred from AFS-Reserve to the Profit and Loss Account. Instead, such gain or loss shall be transferred from AFS-Reserve to the Capital Reserve.
14. FVTPL
(a) The securities held in FVTPL shall be fair valued and the net gain or loss arising on such valuation shall be directly credited or debited to the Profit and Loss Account. Securities that are classified under the HFT sub-category within FVTPL shall be fair valued on a daily basis, whereas other securities in FVTPL shall be fair valued at least on a quarterly, if not on a more frequent basis.
(b) Any discount or premium on the acquisition of debt 12 securities under FVTPL shall be amortised over the remaining life of the instrument. The amortised amount shall be reflected in the financial statements under item II ‘Income on Investments’ of Schedule 13: ‘Interest Earned’ with a contra in Schedule 8:’Investments’.
(c) Securities under FVTPL shall be subject to income recognition, asset classification and provisioning norms as specified in Chapter X of these Directions.
15. Investments in Subsidiaries, Associates and Joint Ventures
(a) All investments (i.e., including debt and equity) in subsidiaries, associates and joint ventures shall be held at acquisition cost, subject to the requirements of Chapter IV above.
(b) Any discount or premium on the acquisition of debt 13 securities of subsidiaries, associates and joint ventures shall be amortised over the remaining life of the instrument. The amortised amount shall be reflected in the financial statements under item II ‘Income on Investments’ of Schedule 13: ‘Interest Earned’.
(c) In case where there is already an investment in an entity which is not a subsidiary, associate or joint venture and subsequently the investee entity becomes a subsidiary, associate or joint venture, the revised carrying value as at the date of such investee entity becoming a subsidiary, associate or joint venture shall be determined as under:
Where the investment is held under HTM, the carrying value less any permanent impairment shall be the revised carrying value.
Where an investment is held under AFS, the cumulative gains and losses previously recognised in AFS-Reserve shall be reversed and adjusted to the carrying value of the investment along with any permanent diminution in the value of the investment to arrive at the revised carrying value.
Where an investment is held in FVTPL, the fair value as on the date of the investee becoming a subsidiary, associate or joint venture shall be taken as the carrying value.
(d) When an investee ceases to be a subsidiary, associate or joint venture, the investments shall be reclassified to the respective category 14 as under:
Where the investment is reclassified into HTM, there shall be no change in the carrying value and consequently no accounting adjustment per se shall be required.
Where the investment is reclassified into AFS or FVTPL, the fair value on the date of such reclassification shall be the revised carrying value. The difference between the revised and previous carrying value shall be transferred to AFS-Reserve and Profit and Loss Account in case of reclassification into AFS and FVTPL respectively.
(e) Any gain/ profit arising on the reclassification/ sale of an investment in a subsidiary, associate or joint venture shall be first recognised in the Profit and Loss Account and then shall be appropriated below the line from the Profit and Loss Account to the ‘Capital Reserve Account’. The amount so appropriated shall be net of taxes and the amount required to be transferred to Statutory Reserves.
(f) Banks shall evaluate investments in subsidiaries, associates or joint ventures for impairment at least on a quarterly, if not more frequent basis. A non-exhaustive list of indicators of potential impairment is as under:
The entity has defaulted in repayment of its debt obligations.
The loan amount of the entity with any bank has been restructured.
The credit rating of the entity has been downgraded to below investment grade.
The entity has incurred losses for a continuous period of three years and the net worth has consequently reduced by 25 per cent or more.
There is a significant decline in the fair value vis-à-vis the carrying value for a period of six months or more. For the purpose of this sub-clause the term significant shall be interpreted as at least 20 per cent. Banks, with the approval of their Boards, may apply even more conservative thresholds.
Any or all of the entity’s outstanding securities have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons.
In the case of a new entity/ project where the originally projected date of achieving the breakeven point has been extended i.e., the entity/ project has not achieved break-even within the gestation period as originally envisaged.
(g) When the need to determine whether impairment has occurred arises in respect of a subsidiary, associate or joint venture, the bank shall obtain a valuation of the investment by an independent registered 15 valuer and make provision for the impairment, if any. Such diminution shall be provided by recognising it as an expense in the Profit and Loss Account. It may be subsequently reversed through Profit and Loss Account, if there is a reversal of the diminution.
CHAPTER – VI
Reclassifications between categories
16. After transition 16 to this framework, banks shall not reclassify investments between categories (viz. HTM, AFS and FVTPL 17 ) without the approval of their Board of Directors. Further, reclassification shall also require the prior approval 18 of the Department of Supervision (DoS), RBI.
17. The reclassification should be applied prospectively from reclassification date.
18. When a bank reclassifies investments from one category to another category, the accounting treatment shall be as given in the table below. The bank shall disclose the details of such reclassification including the reclassification adjustments in the notes to the financial statements:
Sl. No.
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/DOR/2023-24/104 · issued 12 Sep 2023. The plain-English explanation above is BankPulse’s own independent summary.