The Reserve Bank of India (RBI) on Friday proposed new standards for the classification and valuation of banks’ investment portfolios to align with the global prudential framework and accounting standards.
According to the proposed standards, banks’ investment portfolios will be divided into three categories: held-to-maturity (HTM), available-for-sale (AFS) and fair value through profit or loss (FVTPL).
Within FVTPL, Holdings for Trading (HFT) is a subcategory that is aligned to the ‘Trading Book’ specifications according to the Basel III framework.
The new banking portfolio classification standards will come into effect from April 1, 2023, the RBI paper said, while stakeholders will comment on a discussion paper on February 15.
The new standards propose to bridge the gap between existing guidelines and global standards and practices regarding classification, valuation and operations of commercial banks’ investment portfolios.
Existing instructions regarding prudential standards for investment portfolio classification and valuation are largely based on the Report of Informal Group on Valuation of Banks’ Investment Portfolio (Convenor: TC Nair), submitted in 1999.
The recommendations of this informal group culminated in the issuance of prudential guidelines for the investment portfolio in October 2002, which form the basis of our current standards.
There have been significant developments in the global prudential framework, accounting standards and financial markets, both at home and abroad, over the past two decades.
While the RBI has amended the guidelines in response to situations that arise, no comprehensive review has been conducted to date, leading to a wide gap between the country’s standards and global standards and practices, the central bank said.
It is against this background that a discussion paper, on ‘Review of Prudential Norms for Classification, Valuation and Operations of Investment Portfolio of Commercial Banks’, discussed the rationale and evolution of the current framework, associated global standards and developments in financial markets before formulate its proposals.
The document proposes to fully align the prudential framework with global standards, while preserving some elements that take into account the domestic context. PTI NKD CS HRS Hour