The Reserve Bank of India (RBI) is likely to allow banks to apportion any appreciation in their investment portfolio under the available-for-sale (AFS) category to either the revaluation reserve or a special reserve.
This measure will enable the banks to create a cushion against any adverse movement in interest rates/ stock markets.
The position obtaining right now in this regard is that net appreciation under each group of six classifications (gilts, other approved securities, shares, debentures & bonds, joint ventures/ subsidiaries and others -- commercial papers, mutual fund units, etc) within the AFS category is ignored, while net depreciation, if any, is fully provided for in the profit & loss account.
Bankers' pointed out that the net appreciation arising from trading for some of the big banks runs into hundreds of crores of rupees annually and instead of ignoring the gains it would be better to build up a reserve against contingencies.
The central bank had convened a meeting of the chiefs of major commercial banks a couple of months back and elicited their views in this regard.
Under the guidelines for classification and valuation of investments, issued by the RBI last year, all investments of banks are classified into three categories -- held to maturity (HTM), available for sale (AFS) and held for trading (HFT). Further, within each of these categories investments are disclosed in the balance sheet under six classifications.
As per the guidelines, investments by banks in the HTM category (core permanent investments) are not to exceed 25 per cent of their total investment portfolio while the balance 75 per cent has to be apportioned between the AFS and HFT.
Investment in the HTM category is valued at cost unless it is more than the face value, in which case the premium is amortised over the period remaining to maturity. In cases where the cost is less than the redemption value, such difference is ignored.
Investments falling in the HFT category are revalued at monthly intervals and the net appreciation/ depreciation under this category is immediately recognised in the income account. Book value of the individual scrip is also changed according to the revaluation.
Investments in the AFS category are marked to market at the end of each year. Net depreciation in each of the categories is provided for and the net appreciation, if any, is ignored. The book value of the individual securities are not changed due to valuation.
