Capital Adequacy – Revised definition of Trading Book

The Reserve Bank on Wednesday notified that the revised definition of trading book for capital adequacy in terms of MD on investments dated September 12, 2023. As per the guidelines, the investment portfolio would be categorized into 3 categories viz. Held to maturity (HTM), Available for sale (AFS), and Fair Value through Profit and Loss (FVTPL). Hereafter, Held for Trading (HFT) would be a separate investment sub-category within FVTPL aligned with the specification for Trading Book as per Basel III framework. The 2023 guidelines have done away with the maximum period within which investment in the HFT category needs to be sold. The 2023 guidelines have also revised the classification of investment in subsidiaries, associates, and joint ventures.

Further, all the investments should be measured at fair value on initial recognition. Unless facts and circumstances suggest that fair value is materially different from the acquisition cost, it must be presumed that the acquisition cost is the fair value as per the 2021 regulation.

Securities held under HTM should be carried at a cost not marked to market (MTM) after initial recognition.

Securities held under AFS should be fair value at least every quarter if not more frequently.

Securities held under HFT within the sub-category of FVTPL should be fair value daily whereas investment in subsidiaries, associates, and joint ventures should be at acquisition cost.

The 2021 regulations place a ceiling in percentage to total investments and also a ceiling on SLR securities that can be held in HTM. These ceilings are now dispensed with. However, the controls over sales of HTM securities are tightened to ensure that basic principles for the classification of HTM are not invalidated. Accordingly, any sale under HTM should be made by the Bank’s Board-approved policy and details need to be disclosed in the notes of accounts.

Reclassification between categories (i.e., HTM, AFS, and FVTPL) is not permitted without the approval of the Board of Directors and RBI, after transitioning to revised classification. However, at the time of transition banks would be allowed one time option to reclassify their investment and adjust gains or losses arising from such reclassification.

The need to maintain an investment Reserve Account (IRA) would be dispensed with. The balance in IRA if any on 31.03.2024 should be transferred to revenue/general reserve provided the bank meets the minimum regulatory requirements of Investment Fluctuation Reserve (IFR). If the bank does not meet the minimum regulatory requirements, a balance should be transferred to the IFR account.

The Banking regulator further said that all these instructions shall be applicable from April 1, 2024, to all Commercial Banks (excluding Regional Rural Banks).

RBI said that the final guidelines on ‘Market Risk Capital Requirements – Simplified Standardised Approach’ will be implemented at a later date and detailed guidelines will be issued separately.