Mumbai: The Reserve Bank of India proposed a new investment category for banks—fair value through profit and loss (FVTPL) account—as part of its initiatives to align lenders’ investment portfolio regulations with the global accounting standards.
In a discussion paper released on Friday, RBI said the investment portfolio of banks shall now be divided into three categories—held to maturity (HTM), available for sale (AFS) and FVTPL.
The existing held-for-trading (HFT) category will now come under the FVTPL category, according to the proposed rules. The HFT category was for debt securities purchased by banks with the intent of selling them within a short period of time. Under FVTPL, debt instruments are measured at fair value through a profit and loss account.
The new bank portfolio classification norms will come into effect from 1 April 2023, the paper said, while inviting comments on a discussion paper from stakeholders by 15 February.
Banks were to adopt the Indian version of global accounting standards, Ind AS, from 1 April 2018. But the central bank had deferred its implementation several times as the banks were not prepared to make the transition.
Ind AS is on a par with the International Financial Reporting Standard (IFRS) 9, under which banks are required to undertake early recognition of provisions for loss on loans and off-balance sheet exposures based on an expected credit loss (ECL) model. Currently, Indian banks follow the Generally Accepted Accounting Principles (GAAP), which requires banks to recognize mark-to-market losses.
In the discussion paper, RBI said debt instruments with fixed or determinable payments and fixed maturity, with the intent of holding till maturity, shall now be classified as HTM. Corporate bonds have also been allowed to be held under HTM, which was not the case earlier. Bank investments in equity shares of subsidiaries, associates and joint ventures shall also be carried at cost under HTM, it said.
RBI has recommended the removal of the ceiling on investment in HTM as a percentage of total investments, besides the ceiling on SLR securities. Currently, banks are allowed to invest beyond 25% of total investments under HTM, provided the investment in government securities for meeting the statutory liquidity ratio (SLR) requirement is capped at 18%.
Furthermore, the paper said that debt instruments held by a bank till maturity or sold before maturity would be eligible for AFS. Equity instruments will also be classified under AFS. RBI said securities held in HTM will be carried at cost and will not require marking to market after the initial recognition, and a discount or premium on the acquisition can be amortized over the life of the instrument.
Securities held within the HFT sub-category shall be subject to daily MTM while other securities within FVTPL shall be marked to market at least on a quarterly, if not more frequent basis, it added.
Investment Reserve Account (IRA) shall be discontinued, and its balance shall be transferred to any reserve under “Revenue and Other Reserves”, which is reckoned for CET 1, the paper said.
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