prudential: RBI proposes new standards for classification and assessment of banks’ investment portfolio

MUMBAI: The Reserve Bank of India (RBI) on Friday proposed new standards for the classification and valuation of banks’ investment portfolio, with a view to aligning them with the global prudential framework and accounting standards.
According to the proposed standards, the investment portfolio of banks will be divided into three categories – held to maturity (HTM), available for sale (AFS) and fair value through profit and loss (FVTPL) .
Within the FVTPL, held-for-trading (HFT) securities must be a sub-category aligned with the specifications of “trading book” under the Basel-III framework.
The new banking book classification standards will come into effect on April 1, 2023, the RBI document said, while inviting stakeholders to comment on a working paper in this regard by February 15.
The new standards propose to bridge the gap between existing guidelines and global standards and practices for the classification, valuation and operations of commercial banks’ investment portfolio.
The existing guidance on prudential standards on classification and valuation of the investment portfolio is largely based on the report of the informal group on the valuation of the investment portfolio of banks (organizer: TC Nair), which was submitted in 1999.
The recommendations of this informal group resulted in the publication of prudential guidelines on 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 as well as in financial markets, both national and global, over the past two decades.
While the RBI has been fine-tuning the guidelines in response to situations as they arise, a full review has not been undertaken so far, resulting in a wide gap between the country’s standards and the standards and global practices, the central bank said.
It is in this context that a working paper, entitled “Review of Prudential Standards 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 formulating its proposals.
The document proposes to globally align the prudential framework with global standards while retaining certain elements taking into account the national context.
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