New norms for classification and valuation of banks

New norms for classification and valuation of banks

The Reserve Bank of India RBI proposed new norms for the classification and valuation of the investment portfolio of banks, with a view to align them with the global prudential framework and accounting standards.

According to the proposed norms, the investment portfolio of held-to maturity HFT will be divided into three categories, which are available for sale AFS and fair value through profit and loss account FVTPL Within FVTPL, held-for trading HFT will be a sub-category, as per the Basel-III framework.

The paper said that the new bank portfolio classification norms will come into effect on April 1, 2023, while inviting comments on a discussion paper in this regard from stakeholders by February 15.

The new norms aim to bridge the gap between the existing guidelines and global standards and practices with regard to classification, valuation and operations of the investment portfolio of commercials.

The Report of the Informal Group on Valuation of the Banks' Investment Portfolio Convenor: T C Nair was submitted in 1999 and contains the current instructions on the prudential norms on the classification and valuation of the investment portfolio.

The recommendations of this informal group culminated in the issue of prudential guidelines on the investment portfolio in October 2002, which forms the basis of our current norms.

The financial markets, both domestic and global, have been the subject of significant developments in the past two decades, as well as in the global prudential framework.

The central bank said that the guidelines were being tweaked in response to situations as they emerge, but a comprehensive review has not been undertaken so far, resulting in a wide gap between the country's norms and global standards and practices.

A discussion paper on Prudential Norms for Classification, Valuation and Operations of Investment Portfolio of Commercial Banks reviews the rationale and evolution of the current framework, the corresponding global standards, and developments in the financial markets before framing its proposals.

The paper proposes to align the prudential framework with global standards while retaining some elements considering the domestic context.