CREDIT POLICY
GOVT & ECONOMY
COMMENTARY
INTERVIEWS
BUDGET
SPECIALS
CHAT
ARCHIVES
SEARCH REDIFF

RBI panel moots classification of banks' investments

An informal group of the Reserve Bank of India, on valuation of banks' investments portfolio, has recommended that banks may classify their investments into three categories -- ''held for trading'', ''available for sale'' and ''permanent''.

Elaborating the group's reccommedations in the mid-term Monetary and Credit Policy today, the RBI said that the group's report would be circulated among banks for comments and also placed before the Board for Financial Supervision for advice.

A final decision will be taken, thereafter, on the procedure for valuation of investments with effect from April 1, 2000.

The group which suggested norms for classification as also changes in accounting procedures, has recommended discontinuation of the RBI's practice of prescribing year-end yield-to-maturities or YTM for valuation purposes.

All the recommendations made by the group could be applicable to all banks including new private sector banks.

Securities classified in ''held for trading'' category should be marked to market (to value a position or portfolio at current market prices) on a monthly if not more frequent basis, the RBI said and added that while the depreciation should be recognised in the income account, appreciation, if any, being unrealised, should be appropriated to the ''investment fluctuation reserve'' through income account.

Securities available in the ''available for sale'' category should be marked to market at the year-end or at more frequent intervals as decided by the board of directors.

The gain or loss on revaluation may be taken to the investment fluctuation reserve account without routing through the income account. In the event that balance in the reserve account is insufficient, provision for depreciation should be made in the income account. In the event of sale/realisation of any investment from this category, the actual amount realised may be recognised in the income account.

Securities held in ''permanent'' category can be carried at cost unless it was more than the face value, in which case the premium has to be amortised over the period remaining for maturity of the security.

Banks can shift investments from one category to the other only with the approval of the board of directors.

As government securities across a wide maturity spectrum are traded and market prices are available, the RBI need not prescribe financial year-end term. Banks may refer to the prices available in SGL transactions, NSE trades/quotes, price list of the RBI at the year-end and value the securities to the satisfaction of auditors, the RBI stated.

The RBI also need not prescribe the methodology for valuation of all the non-approved securities comprising PSU bonds and non-PSU bonds and debentures and they could be valued at ''fair value'' by individual banks taking the yield spread between the sovereign yield and the yield on the concerned bonds/similar bonds into consideration.

UNI

ALSO SEE

RBI Governor Bimal Jalan's policy statement

RBI's Credit and Monetary Policy 1999-2000

RBI's Credit and Monetary Policy 1998-1999

Business