The document discusses guidelines for classifying, valuing, and accounting for investments in a bank's portfolio. It outlines three classifications for investments - Held to Maturity, Available for Sale, and Held for Trading - and rules around shifting between categories. It also covers income recognition, non-performing investments, valuation methods for each classification including use of fair value and provisions, and maintaining regulatory reserves like the Investment Fluctuation Reserve. Record keeping for investments held via the Subsidiary General Ledger account with the RBI is also summarized.

1. InvestmentsInvestments
PortfolioPortfolio
By:- CA Abhinav JainBy:- CA Abhinav Jain
Audit OF Bank Treasury

2. Investments PortfolioInvestments Portfolio
1.1. There must be internal investmentThere must be internal investment
policy of an bankpolicy of an bank
2.2. It must be in accordance with statutoryIt must be in accordance with statutory
Rules and regulations and soundRules and regulations and sound
business practice.business practice.
3.3. It must be reviewed time to time.It must be reviewed time to time.

3. Classification of investmentsClassification of investments
1.1. Held to Maturity (HTM)Held to Maturity (HTM)
2.2. Held for Trading (HFT)Held for Trading (HFT)
3.3. Available for sale (AFS)Available for sale (AFS)
There are 3 classification of investmentsThere are 3 classification of investments

4. 1. Held To Maturity1. Held To Maturity
 intention to hold them up to maturity
 should not exceed 25 per cent of the bank’s total
investments.*
 limit can be exceed if investments are in SLR
securities
 But the total investments in SLR securities should
not be more than 25 percent of its DTL liabilities as
on last Friday of the second last fortnight.

5. 1. Held To Maturity1. Held To Maturity
* Following investments will not be included in* Following investments will not be included in
calculation of limit of HTMcalculation of limit of HTM
 Re-capitalization bonds received from the
Government of India.
 Investment in subsidiaries and joint ventures. [A
joint venture would be one in which the bank,
along with its subsidiaries, holds more than 25%
of the equity.]
 The investments in debentures/ bonds, which
are deemed to be in the nature of an advance.

6. 1. Held To Maturity1. Held To Maturity
Sale of investments:-Sale of investments:-
 Profit on sale of investments in this
category should be first taken to the Profit
& Loss Account and thereafter be
appropriated to the ‘Capital Reserve
Account’.
 Loss on sale will be recognized in the
Profit & Loss Account.

7. 2. Held For Trading (HFT)2. Held For Trading (HFT)
 Intention to take short term advantage withIntention to take short term advantage with
regard to interest/price movements.regard to interest/price movements.
 Normally sold within 90 daysNormally sold within 90 days
 No restriction of HoldingsNo restriction of Holdings
 Profit or Loss on sale taken to theProfit or Loss on sale taken to the Profit & Loss
Account.

8. 3. Available for sale (AFS)3. Available for sale (AFS)
 Rest of all investmentsRest of all investments
 No restriction of HoldingsNo restriction of Holdings
 Profit or Loss on sale taken to theProfit or Loss on sale taken to the Profit &
Loss Account
Valuation Part of investments is discussed later.

9. Shifting Among CategoriesShifting Among Categories
1.1. Shifting From/to HTMShifting From/to HTM
2.2. Shifting from AFS to HFTShifting from AFS to HFT
3.3. Shifting from HFT to AFSShifting from HFT to AFS
There can be 3 type of shifting.

10. Shifting Among CategoriesShifting Among Categories
Transfer in all cases should be at the Least
of following:-
1. Acquisition Cost
2. Book Value
3. Market Value
And provide depreciation if any.

11. 1. Shifting From/to HTM1. Shifting From/to HTM
 Allowed only at the beginning of year.Allowed only at the beginning of year.
 No shifting is allowed during the year.No shifting is allowed during the year.
 Approval of BOD is required.Approval of BOD is required.

12. 2. Shifting from AFS to HFT2. Shifting from AFS to HFT
 Approval of BOD/ALCO/Investment
Committee.
 In case of exigencies, shifting may be
done with the approval of the Chief
Executive of the bank/ Head of the ALCO.
 But it should be ratified by the Board of
Directors/ ALCO

13. 3. Shifting from HFT to AFS3. Shifting from HFT to AFS
 Generally it is not allowed, permitted only
under exceptional circumstances
 approval of the Board of Directors/ ALCO/
Investment Committee

14. Income RecognitionIncome Recognition
1.1. Accrual BasisAccrual Basis
2.2. Cash basisCash basis

15. 1. Accrual Basis1. Accrual Basis
 Income from Govt. securities & bonds andIncome from Govt. securities & bonds and
debenture of Corporate bodies if Interest ratedebenture of Corporate bodies if Interest rate
is Pre-determined and It is not in Arrears.is Pre-determined and It is not in Arrears.
 ReturnReturn (interest and principal both)(interest and principal both) on investment ison investment is
guaranteed by CG/SG and it is servicedguaranteed by CG/SG and it is serviced
regularly.regularly.
 income from dividend if right to receiveif right to receive
dividend is established.dividend is established.

16. 2. Cash basis2. Cash basis
 Income from Mutual Fund.Income from Mutual Fund.
 All other income.All other income.

17. Broken Period Interest
(Paid to Seller)
 It should not be capitalized, treat it asIt should not be capitalized, treat it as
expenses.expenses.
 Bank should comply income taxBank should comply income tax
requirements.requirements.

18. Non-performing Investments
(NPI)
NPI (Similar to NPA) is where:-NPI (Similar to NPA) is where:-
 Interest remains unpaid more than 90 days.Interest remains unpaid more than 90 days.
 mutatis-mutandis to preference shares where dividend is
not paid.
 In the case of equity shares, in the event the investment in
the shares of any company is valued at Re.1 per company
on account of the non availability of the latest balance
sheet, those equity shares would also be reckoned as NPI.
 Any Credit facility availed by the issuer is NPA in the books
of bank then investment in any of security issued by the
same issuer is NPI and vice versa.

19. Valuation of Investments
1. Held to Maturity
2. Available For Sale
3. Held For Trading

20. 1. Held to Maturity
 At Least ofAt Least of
 Acquisition Cost (AC)Acquisition Cost (AC)
 Face Value (FV)Face Value (FV)
 If AC > FV then amortized the premium amountIf AC > FV then amortized the premium amount
over the period of holding.over the period of holding.
 MTM is not allowed.MTM is not allowed.
 Recognize depreciation if it is permanentRecognize depreciation if it is permanent
diminution in value.diminution in value.
 Such depreciation should be determined andSuch depreciation should be determined and
provided each investment Individually.provided each investment Individually.

21. 2. Available For Sale
 MTM at quarterly or more frequent intervals.MTM at quarterly or more frequent intervals.
(Individually)(Individually)
 Depreciation - provide provisionDepreciation - provide provision
 Appreciation – ignore it. (i.e. BV will not change)Appreciation – ignore it. (i.e. BV will not change)
 Provision will be debited to the P/L And the least ofProvision will be debited to the P/L And the least of
following is to be transferred from the Investmentfollowing is to be transferred from the Investment
fluctuation Reserve (IFR) to P/Lfluctuation Reserve (IFR) to P/L
 Balance available in IFRBalance available in IFR
 Equivalent amount of provision (Net of tax benefit &Equivalent amount of provision (Net of tax benefit &
consequent reduction in statutory reserve)reduction in statutory reserve)

22. 2. Available For Sale
 If provision is in excessIf provision is in excess
 Transfer such amount to P/LTransfer such amount to P/L
 An equivalent amount (Net of taxes and net ofAn equivalent amount (Net of taxes and net of
transfer to statutory reserve) should be appropriatedtransfer to statutory reserve) should be appropriated
to the IFRto the IFR
 Amount Debited or Credited to P/L due to
provision is to be shown under the head
“Expenditure – Provisions & Contingencies”
 And the amount appropriated and transferred to
P/L due to IFR is to be shown as ‘below the line’
items.

23. 3.Held For Trading
 It should be MTM at monthly or moreIt should be MTM at monthly or more
frequent intervals.frequent intervals.
 The book value of the investment is
to be change with the revaluation.
 All other same as HFT.All other same as HFT.

24. Valuation of Investments
• Each investment in each category should
be valued individually.
 If interest/ principal is in arrears, the banks
should not reckon income and make
provision for the depreciation in the value
of the investment.
 Such depreciation should not be set off
with appreciation of other security.

25. Investment Fluctuation Reserve
 It is prudent to transfer gain realized onIt is prudent to transfer gain realized on
the sale of securities.the sale of securities.
 Created to guard possible reversal ofCreated to guard possible reversal of
unexpected developments.unexpected developments.
 Allowed to build up to 10% of theAllowed to build up to 10% of the
investments under HFT & AFS category.investments under HFT & AFS category.
 This amount will be reckoned for theThis amount will be reckoned for the
TIER-II capitalTIER-II capital

26. Market value
(For the investments in AFS & HFT categories)
 Quoted securities:- valued at quotes atQuoted securities:- valued at quotes at
stock exchange, SGL a/c transaction,stock exchange, SGL a/c transaction,
price list of RBI,PDAI,FIMMDAprice list of RBI,PDAI,FIMMDA
 Unquoted Securities:- valued at on YTMvalued at on YTM
basisbasis

27. Subsidiary Ledger A/CSubsidiary Ledger A/C
(SGL)(SGL)
 It is a Demat form of holding securitiedIt is a Demat form of holding securitied
with RBI.with RBI.
 If any Bank/FI holds this a/c on the behalfIf any Bank/FI holds this a/c on the behalf
of his customer the it is to be said asof his customer the it is to be said as
CSGL (Constituent Subsidiary LedgerCSGL (Constituent Subsidiary Ledger
A/C)A/C)

28. Subsidiary Ledger A/CSubsidiary Ledger A/C
(SGL)(SGL)
 All securities for which SGL facility isAll securities for which SGL facility is
available should be traded through SGLavailable should be traded through SGL
only.only.
 If sufficient balance for securities is notIf sufficient balance for securities is not
available for seller bank and balance ofavailable for seller bank and balance of
funds for purchasing bank then SGL formfunds for purchasing bank then SGL form
will bounce.will bounce.
 If bouncing occurs more than thrice thenIf bouncing occurs more than thrice then
the bank will debarred for 6 months.the bank will debarred for 6 months.

29. Subsidiary Ledger A/CSubsidiary Ledger A/C
(SGL)(SGL)
 SGL transfer form received by purchasingSGL transfer form received by purchasing
bank should be lodged to RBI within 1bank should be lodged to RBI within 1
working days.working days.
 No sale will be by transfer of SGL FormNo sale will be by transfer of SGL Form
 SGL form must be signed by 2 officialsSGL form must be signed by 2 officials
and must indicate trade/deal date and Partand must indicate trade/deal date and Part
C of the SGL form under sale date.C of the SGL form under sale date.

30. Question on Investment limit inQuestion on Investment limit in
HTMHTM
Particulars (Rs. In Crore)
Total Demand and Time
Liabilities 25000
Total Investment 15000
HTM 9000
HFT 2000
AFS 4000
The investment held in HTM 50 Crore is recapitalization
bond received from GOI, 5000 Crore in SLR securities.

31. AnswerAnswer
Particulars
Maximum
Permissible
investment
Actual
Amount
invested Remarks
Investment in HTM (Non SLR
Securities) 3750 3950
Extra
Investment
of 200 crore
Investment in HTM (SLR
Securities) 6250 5000 ok
Total investment can be
invested in HTM 10000 9000 Ok
Note:- Amount invested in recapitalization bond or in joint venture or in bonds
or debenture (assumed be in advance) is not to be included in calculation of
actual amount invested because this investment is allowed

32. Thank YouThank You
THE ENDTHE END