Revised norms are issued by the RBI for bank investment portfolios, which will take effect in April 2024

The Reserve Bank of India (RBI) recently updated the directions that it provided to banks on the classification, valuation, and operation of their investment portfolios. The revised directions were created in response to feedback made about the discussion paper that was published on the subject in January 2022.

The guidelines establish a framework for banks to categorize their investments and outline how they should be valued and managed to ensure transparency and stability in the banking system. 

The revised guidelines include the classification of investment portfolios based on principles, stricter regulations for sales out of the held-to-maturity (HTM) category and transfers into it, the inclusion of non-SLR securities in HTM subject to certain requirements being met, and symmetric recognition of gains and losses.

According to the RBI, these guidelines are anticipated to improve banks' financial reporting quality, disclosures (disclosures of fair value of investments in the HTM category, fair value hierarchy, sales out of HTM, etc.), give the corporate bond market a boost, make it easier to use derivatives for hedging, and strengthen banks' overall risk management framework.

While important prudential safeguards like investment fluctuation reserve (IFR), due diligence/limits concerning non-SLR investments, internal control systems, reviews, and reporting others have been retained, prudential concerns on the reliability of valuation have been addressed, the revised directions still align accounting norms for banks' investment portfolios with global financial reporting standards.

With effect for the financial year commencing on April 1, 2024, the revised directions shall apply to all commercial banks (excluding Regional Rural Banks).