Investment Portfolio of a Bank

The RBI’s Master Circular on “Prudential norms for clarification, valuation and operation of investment portfolio by banks” lays down that   the entire investment portfolio of a bank (including SLR securities and non-SLR securities) should be classified under three categories

1. Held to Maturity

2. Available for Sale and

3. Held for Trading.

 However, in the Balance Sheet, of a Bank the investments will disclosed in six classifications:

(a) Government securities,

(b) Other approved securities,

(c) Shares,

(d) Debentures and Bonds,

(e) Subsidiaries/ joint ventures, and

(f) Others (CP, Mutual Fund Units, etc.).

Held to Maturity

The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity (HTM).

This investments should not exceed 25 per cent of the bank’s total investments.

The following investments will be classified under ‘Held to Maturity’ but will not be accounted for the purpose of ceiling of 25% specified for this category:

1. Re-capitalization bonds received from the Government of India towards their re-capitalization requirement and held in their investment portfolio.

2. Investment in subsidiaries and joint ventures. [A joint venture would be one in which the bank, along with its subsidiaries, holds more than 25% of the equity.]

3. The investments in debentures/ bonds, which are deemed to be in the nature of an advance.

Banks are, however, allowed since September 2, 2004, to exceed the Limit of 25 per cent of total investment under HTM category provided the excess comprises only of SLR securities; and the total SLR securities held in HTM is not more than 25 per cent of their Demand and Time Liabilities (DTL) as on last Friday of the second preceding fortnight.

Profit on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter be appropriated to the ‘Capital Reserve Account’. Loss on sale will be recognized in the Profit & Loss Account

Held for Trading

The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading (HFT).

HFT securities are to be sold within 90 days from the date of acquisition.

Available for Sale

The securities which do not fall within the above two categories will be classified under Available for Sale.

The banks will have the freedom to decide on the extent of holdings under Available for Sale and Held for Trading categories taking into account various aspects such as

• Basis of intent,
• Trading strategies,
• Risk management capabilities,
• Tax planning,
• Manpower skills,
• Capital position etc.

Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account

Shifting among Categories

As per the RBI Guidelines, banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year.

Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year.

Banks may shift investments from Available for Sale category to Held for Trading category with the approval of their Board of Directors/ ALCO/ Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the bank/ Head of the ALCO, but should be ratified by the Board of Directors/ ALCO.

Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed.

However, it will be permitted only under exceptional circumstances with the approval of the Board of Directors/ ALCO/ Investment Committee.

Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for.

The above are the compliances which a Bank has to comply the RBI directions in the Investment Portfolio of the Bank.