Comments on the Constituents of Schedule 8 – Investments :
(I). Investments in India :
1. Government securities : Includes Central and State Government securities and Government treasury bills. These securities should be shown at the book value. However, the difference between the book value and market value should be given in the notes to the balance sheet.
2. Other Approved Securities: Securities, other than Government Securities which according to the Banking Regulation Act, 1949 are treated as approved securities, should be included here.
3. Share: Investment in Shares of Companies and Corporations not included in item (ii) above should be included here.
4. Debentures and Bonds: Investments in Debentures and Bonds of companies and corporations not included in item (ii) should be included here.
5. Investments in Subsidiaries /Joint Ventures : Investments in subsidiaries/joint ventures (Including RRBs) Should be included here.
6. Others, Includes residual investments, if any, like gold, commercial paper and other investments like Certificate of Deposits, Security Receipts (SR), Pass Through Certificates (PTC), Units of Mutual Funds, Venture Capital Funds, Real Estate Funds, etc.
7. The Investment under “Held to Maturity” should not exceed 25% of bank’s total Investment. This limit can only be exceeded under specific circumstances as prescribed by RBI.
However banks are not permitted to make investments in immovable properties for earning rentals, though it can gainfully deploy any business premises, which is not being used for the business. Thus, bank will not have immovable properties as part of their investment portfolio. (Section 6 of Banking Regulation Act, 1949).
(II). Investment Outside India:
1. Government Securities (Including Local Authorities) All foreign Government securities including securities issued by local authorities may be classified under this head.
2. Subsidiaries and/or Joint Ventures abroad : All investments made in the share capital of subsidiaries floated outside India and /or Joint Ventures abroad should be classified under this head.
3. Others: All other Investments outside India may be shown under this head.
Principal Accounting Requirements of Investments :
Banks are required to classify their entire investments portfolio (SLR and non-SLR securities) into three categories :
Held To Maturity (HTM) : Securities acquired by a bank to be held upto maturity.
Held for Trading (HFT) : Securities acquired by a bank with the intention of trading i.e. to benefit from short –term price/interest rate movements.
Available for Sale (AFS) : The securities which do not qualify for the above two categories fall into this category.
However, in the balance sheet (Schedule 8), the investments will be disclosed in six classifications as described above.
Banks should decide the category of investment at the time of acquisition and the decision should be recorded on the investment proposal.
Further Disclosures in respect of Investments:
The disclosure relating to investments forms part of ‘Notes to Accounts’ and is governed by the prudential norms for classification, Valuation and Operation of Investment Portfolio by banks laid down by the Reserve Bank of India.
Accounting Policy on Investments:
An illustrative accounting policy on investments in respect of Commercial Banks id given below:
2. Investments :
The transactions in all securities are recorded on “Settlement Date”.
2.1 Classification :
Investment are classified in to three categories, viz. Held to Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT) as per RBI guidelines.
2.2 Basis of Classification:
1. Investments that the Bank intends to hold till maturity are classified as Held to Maturity (HTM).
2. Investments that are held principally for resale within 90 days from the date of purchases are classified as Held for Trading (HFT).
3. Investments which are not classified as above two categories, are classified as Available for Sale (AFS).
4. An investment is classified as HTM, HFT or AFS at the time of it’s purchase and subsequent shifting amongst categories is done in conformity with regulatory guidelines.
5. Investments in subsidiaries, joint ventures and associates are classified as HTM.
2.3 Valuation :
i. In determining the acquisition cost of an investment :
a) Brokerage/commission received on subscription is reduced from the cost
b) Brokerage, Commission, Securities Transaction Tax (STT) etc. paid in connection with acquisition of investments are expensed upfront and excluded from cost.
c) Broken period interest paid /received on debt instruments is treated as interest expense/ income and is excluded from cost/sale consideration.
d) Cost is determined on the weighted average cost method under AFS & HFT and FIFO for investments under HTM
ii. Transfer of securities from HFT/AFS category to HTM category is carried out at the lower of acquisition cost/book value/market value on the date of transfer. The depreciation, if any, on such transfer is fully provided for. However transfer of securities HTM category to AFS on acquisition price/book value. After transfer securities will be revalued immediately and resultant depreciation shall be provided.
iii. Treasury Bills and Commercial Papers are valued at carrying cost.
iv Held to Maturity category:
a) Investments under Held to Maturity category are carried at acquisition cost unless it is more than face value. In which case premium is amortized over the period of remaining maturity on constant yield basis. Such amortization shall be matched with income under the head “Interest on Investments”.
b) Investments in subsidiaries, joint ventures and associates (both Indian and abroad) are valued at historical cost. A provision is made for diminution, other than temporary, for each investment individually.
c) Investments In Regional Rural Banks are valued at carrying cost e. Book Vale.
v Available for Sale and Held for Trading categories:
Investment held under AFS and HFT categories are individually revalued at the market price or fair value as per regulatory guidelines, and only the net depreciation of each group for each category viz. (i). Government securities, (ii). Other Approved Securities (iii). Shares (Iv) Bonds and Debentures (v) Subsidiaries & Joint Ventures and (vi) others is provided for and net appreciation is ignored.
vi. In case of sale of NPA (Financial Assets) to securitization company (SC)/ Asset Reconstruction Company (ARC) against issue of security receipt (SR) investment in SR is recognized at lower of : (I) Net Book Value or (II). Redemption Value of SR. SRs issued by an SC/ARC are valued in accordance with the guideline applicable for Non SLR instruments. Accordingly, in case where the SRs issued by the SC/ARC are limited to the actual realization of the financial assets assigned to the instruments in the concerned scheme, Net Asset Value, obtained from SC/ARC, is reckoned for valuation for the investments.
vii. Investments are classified as performing and non performing, based on the guideline issued by the RBI in the case of domestic offices and respective regulators in the case of foreign offices. Investment of domestic offices become non performing where :
a) Interest/Installment (Including maturity proceeds) is due and remained unpaid for more than 90 days.
b) In case of equity shares, in the event the investment in the share of any company is valued @ Rs. 1 per company on account of the non – availability of the latest balance sheet, those equity shares would be reckoned as NPI.
c) If any credit facility availed by and entity is NPA in the books of the Bank investment in any of the securities issued by the same entity would also be treated as NPI and vice versa.
d) The above would apply mutatis mutandis to Preference Shares where the fixed dividend is not paid.
e) The investments in debentured/bonds, which are deemed to be in the nature of advance, are also subjected to NPI norms as applicable to investments.
f) In respect of foreign offices, provisions for NPIs are made as per the local regulations as per the norms of RBI which is more stringent.
viii. Accounting for REPO / Reverse REPO transactions (Other than Liquidity Adjustment Facility (LAF) )
a) The securities sold and purchased under repo/ reverse repo are accounted as collateralized lending and borrowing transactions. However securities are transferred in the case of normal outright sale/purchase transaction and such movement of securities is reflected using the Repo/Reverse repo accounts and contra entries. The above entries are reversed on the date of maturity. Cost and revenues are accounted as interest expenditure/income, as the case may be. Balance in repo account is classified under Schedule 4 Borrowing and balance of reverse repo under schedule 7 (Balance with banks and money at call & short notice).
b) Interest expended/earned on securities purchased/sold under LAF is accounted for as Expenditure or revenue.
ix. Market purchase and reverse purchase transactions as well as the transactions with RBI under LAF are accounted for as Borrowing and lending transactions in accordance with the extant RBI guidelines.
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