RBI/2005-06/268 UBD.BPD(PCB).MC.No. 13/16.20.00/2005-06, DT. 29/12/2005
Master Circular on Investments by Primary (Urban) Co-operative Banks(PART -II)
PREVIOUS
Index Ratio for
March 1998 | WPI for November 1997
= ------------------------------------
Base WPI
329.9
= -------- = 1.01196 or 1.01 (rounded to two decimal places)
326.00 |
Cost of the bonds for valuation as on 31 March 1998 Rs. 100 x 1.01 = Rs. 101.00.
(a) It is clarified that the reckoning of number of years for the purpose of deciding upon appropriate YTM Rate be done by rounding off the fractional period of a year to the nearest completed year.
(b) As regards valuation of other unquoted securities including PSU bonds, banks should uniformly follow ‘Yield to Maturity’ method for arriving at valuation of unquoted securities.
(ii) Treasury Bills should be valued at carrying cost.
(iii) State Government Securities
State Government securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/FIMMDA periodically.
(iv) Other Approved Securities
Other approved securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/FIMMDA periodically.
16.2.3 Unquoted non-SLR securities
(i) Debentures/Bonds of AIFIs and PSUs
All debentures/bonds other than debentures/ bonds which are in the nature of advance should be valued on the YTM basis. Such debentures/bonds may be of different ratings. These will be valued with appropriate mark-up over the YTM rates for Central Government securities as put out by PDAI/FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the debentures/bonds by the rating agencies subject to the following:
(a) The rate used for the YTM for rated debentures/bonds should be at least 50 basis points above the rate applicable to a Government of India loan of equivalent maturity,
(b) The rate used for the YTM for un-rated debentures/ bonds should not be less than the rate applicable to rated debentures/bonds of equivalent maturity. The mark-up for the un-rated debentures/bonds should appropriately reflect the credit risk borne by the bank.
(c) Where interest/principal on the debenture/bonds is in arrears, the provision should be made for the debentures as in the case of debentures/bonds treated as advances. The depreciation/provision requirement towards debentures where the interest is in arrears or principal is not paid as per due date, shall not be allowed to be set-off against appreciation against other debentures/bonds.
(ii) Where the debentures/bond is quoted and there have been transactions within 15 days prior to the valuation date, the value adopted should not be higher than the rate at which the transaction is recorded on the stock exchange.
(iii) Shares of Co-operative Institutions
If primary (urban) co-operative banks have regularly received dividends from co-operative institutions, then their shares should be valued at face value. In a number of cases, the co-operative institutions in whose shares the primary (urban) co-operative banks have made investments have either gone into liquidation or have not declared dividend at all. In such cases, the banks should make full provision in respect of their investments in shares of such co-operative institutions. In cases where the financial position of co-operative institutions in whose shares banks have made investments is not available, the shares have to be taken at Re. 1/- per co-operative institution.
16.2.4 Shares of All India Financial Institutions
Primary (urban) co-operative banks are allowed to invest in the shares of all India Financial Institutions.
Where stock exchange quotations are available, the shares should be valued accordingly. Equity shares for which current quotations are not available or where the shares are not quoted on the stock exchanges, should be valued at break-up value (without considering 'revaluation reserves', if any) which is to be ascertained from the company's latest balance sheet (which should not be more than one year prior to the date of valuation). In case the latest balance sheet is not available, the shares are to be valued at Re. 1 per company.
16.2.5 Units of UTI
Investments in quoted Mutual Fund Units should be valued as per stock exchange quotations. Investments in non-quoted Mutual Funds Units are to be valued on the basis of the latest re-purchase price declared by the Mutual Funds in respect of each particular Scheme. In case of funds with a lock-in period, or where repurchase price/market quote is not available, Units could be valued at NAV. If NAV is not available, then these could be valued at cost, till the end of the lock-in period.
16.2.6 Commercial Paper
Commercial paper should be valued at the carrying cost
17 INVESTMENT FLUCTUATION RESERVE (IFR)
With a view to build up adequate reserves to guard against market risks:
17.1 Banks should build up Investment Fluctuation Reserve (IFR) out of realised gains on sale of investments, and subject to available net profit, of a minimum of 5 per cent of the investment portfolio by March 2008. This minimum requirement should be computed with reference to investments in two categories, viz., ‘Held for Trading (HFT)’ and ‘Available for Sale (AFS)’. It will not be necessary to include investment under ‘Held to Maturity’ category for the purpose. However, banks are free to build up a higher percentage of IFR up to 10 per cent of the portfolio depending on the size and composition of their portfolio, with the approval of their Board of Directors.
17.2 Banks should transfer maximum amount of the gains realised on sale of investment in securities to the IFR. Transfer to IFR shall be as an appropriation of net profit after appropriation to Statutory Reserve.
17.3 The IFR, consisting of realised gains from the sale of investments from the two categories, viz., ‘Held for Trading’ and ‘Available for Sale’, would be eligible for inclusion in Tier II capital.
17.4 Transfer from IFR to the Profit & Loss Account to meet depreciation requirement on investments would be a ‘below the line’ extraordinary item.
17.5 Banks should ensure that the unrealised gains on valuation of the investment portfolio are not taken to the Income Account or to the IFR.
17.6 Banks may utilise the amount held in IFR to meet, in future, the depreciation requirement on investment in securities.
17.7 Creation of IFR as per the above guidelines is mandatory for primary (urban) co-operative banks having aggregate Demand and Time Liabilities of Rs. 100 crore and above, and optional for smaller banks.
17.8 Distinction between IFR and IDR
It may be noted that Investment Fluctuation Reserve (IFR) is created out of appropriation from the realised net profits / out of profits earned on account of sale of investments initially held under HTM category but subsequently shifted to AFS or HFT category, and forms part of the reserves of the bank qualifying under Tier II capital, whereas Investment Depreciation Reserve (IDR) is a provision created by charging diminution in investment value to Profit & Loss Account. While the amount held in IFR should be shown in the balance sheet as such, the amount held in IDR should be reported as Contingent provisions against depreciation in investment.
18 REPORTING
Scheduled primary (urban) co-operative banks are required to submit a statement containing information on their investments in approved securities and money market instruments, etc. on quarterly basis. The statement as at the end of each calendar quarter should reach RBI, Central Office, Urban Banks Department within 10 days from the close of the quarter.
Annexure I
Master Circular on Investments Certain clarifications on brokers’ limits
[Ref: Para 7.3]| Sr.No. | Issue raised | Response |
| 1. | The year should be calendar year or financial year? | Since banks close their accounts at the end of March, it may be more convenient to follow the financial year. However, the banks may follow calendar year or any other period of 12 months provided, if it is consistently followed in future. |
| 2. | Whether to arrive at the total transactions of the year, transactions entered into directly with counter-parties, i.e. where no brokers are involved would also be taken into account? | Not necessary. However, if there are any direct deals with the brokers as purchasers or sellers the same would have to be included in the total transactions to arrive at the limit of transactions to be done through an individual broker. |
| 3. | Whether in case of ready forward deals both the legs of the deals i.e. purchase as well as sale will be included to arrive at the volume of total transactions? | Yes |
| 4. | Whether central loan/state loan/treasury bills etc. purchased though direct subscriptions/auctions will be included in the volume of total transactions? | No, as brokers are not involved as intermediaries. |
| 5. | It is possible that even though bank considers that a particular broker has touched the prescribed limit of 5%, he may come with an offer during the remaining period of the year which the bank may find to its advantage as compared to offers received from the other brokers who have not yet done business upto the prescribed limit. | If the offer received is more advantageous the limit for the broker may be exceeded and the reasons therefore recorded and approval of the competent authority/Board obtained post facto. |
| 6. | Whether the transactions conducted on behalf of the clients would also be included in the total transactions of the year? | Yes, if they are conducted through the brokers. |
| 7. | For a bank which rarely deals through brokers and consequently the volume of business is small maintaining the brokewise limit of 5% may mean splitting the orders in small values amongst different brokers and there may also arise price differential. | There may be no need to split an order. If any deal causes, the particular broker's share to exceed 5% limit, our circular provides the necessary flexibility inasmuch as Board's postfacto approval can be obtained. |
| 8. | During the course of the year, it may not be possible to reasonably predict what will be the total quantum of transactions through brokers as a result of which there could be deviation in complying with the norm of 5%. | The bank may get postfacto approval from the Board after explaining to it, the circumstances in which the limit was exceeded. |
| 9. | Some of the small private sector banks have mentioned that where the volume of business particularly, the transactions done through brokers is small the observance of 5% limit may be difficult. A suggestion has, therefore, been made that the limit may be required to be observed if the business done through a broker, exceeds a cut-off point of say Rs.10 crores. | As already observed the limit of 5% can be exceeded subject to reporting the transactions to the competent authority post facto. Hence, no change in instructions are considered necessary. |
| 10. | Whether the limit is to be observed with reference to total transactions of the previous year as the total transactions of the current year would be known only at the end of the year? | The limit has to be observed with reference to the year under review. While operating the limit, the bank should be in view the expected turnover of the current year which may be based on turnover of the previous year and anticipated rise or fall in the volume of business in the current year. |
Annexure II
Master Circular on Investments - Certain Definitions
[ Vide para 12.3.1(iii) ]1. With a view to imparting clarity and to ensure that there is no divergence in the implementation of the guidelines, some of the terms used in the guidelines are defined below.
2. A security will be treated as rated if it is subjected to a detailed rating exercise by an external rating agency in India which is registered with SEBI and is carrying a current or valid rating. The rating relied upon will be deemed to be current or valid if:
i) the credit rating letter relied upon is not more than one month old on the date of opening of the issue, and
ii) the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and
iii) the rating letter and the rating rationale is a part of the offer document.
iv) In the case of secondary market acquisition, the credit rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.
v) Securities which do not have a current or valid rating by an external rating agency would be deemed as unrated securities.
3. The investment grade ratings awarded by each of the external rating agencies operating in India would be identified by the IBA/ FIMMDA. These would also be reviewed by IBA/ FIMMDA at least once a year.
4. A ‘listed’ debt security is a security which is listed in a stock exchange. If not so, it is an ‘unlisted’ debt security.
5. A non performing investment (NPI), similar to a non performing advance (NPA), is one where :
a. Interest/ instalment (including maturity proceeds) is due and remains unpaid for more than 180 days. The delinquency period has become 90 days with effect from 31st March 2004.
b. if any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities issued by the same issuer would also be treated as NPI.
Annexure III
Master Circular on Investments
List of All India Financial Institutions
[Vide para 12.3.4.1 (ii)]1. IFCI Ltd.
2. Industrial Investment Bank of India Ltd.
3. Tourism Finance Corporation of India Ltd.
4. Risk Capital and Technology Finance Corporation Ltd.
5. Technology Development and Information Company of India Ltd.
6. Power Finance Corporation Ltd.
7. National Housing Bank.
8. Small Industries Development Bank of India
9. Rural Electrification Corporation Ltd.
10. Indian Railways Finance Corporation Ltd.
11. National Bank for Agriculture and Rural Development.
12. EXIM Bank of India.
13. Infrastructure Development Finance Co. Ltd.
Annexure IV
Master Circular on Investments Disclosures Requirements
[ Vide para 12.9 ]i) Issuer composition of Non SLR investments
(Rs. in crore)
No.
1. | Issuer
2. | Amount
3. | Extent of ‘belowinvestmentgrade’ Securities
4. | Extent of ‘unrated’ securities
5. | Extent of ‘unlisted’ securities
6. |
| 1 | PSUs | | | | |
| 2 | FIs | | | | |
| 3 | Nationalised Banks | | | | |
| 4 | Others | | | | |
| 5 | Provision held towards depreciation | | X X X | X X X | X X X |
| | Total * | | | | |
NOTE: 1.* Total under column 3 should tally with the total of investments in Schedule 8 to the balance sheet:
2. Amounts reported under columns 4, 5, and 6 above may not be mutually exclusive.
ii) Non performing Non-SLR investments
| Particulars | Amount(Rs. Crore) |
| Opening balance | |
| Additions during the year since 1st April | |
| Reductions during the above period | |
| Closing balance | |
| Total provisions held | |
Annexure V
Master Circular on Investments Special concessions to UCBs during the year 2004-05
[ Vide para 16.1.7 ]UCBs were permitted, as a one-time measure, to exceed the limit of 25% of total investments under HTM category and to shift SLR securities to the HTM category one more time (cf para 15.5.1) during the accounting year 2004-05 (vide RBI circular dated September 2, 2005) provided the excess investments are in SLR securities and the total SLR securities held in the HTM category is not more than 25 per cent of their NDTL as on the last Friday of the second preceding fortnight. Banks were also advised that such shifting should be done at the acquisition cost/book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. Further, the Non-SLR investments in bonds of PSUs and shares (as permitted by RBI) classified under HTM category may remain in that category and no fresh non-SLR securities are permitted to be included in the HTM category.
In view of the representations made by Federations of UCBs expressing difficulties in meeting with the provisioning requirements consequent to shifting of securities to HTM category, the issue was reexamined and decided, as a special case, to relax the requirements, as under:
1. Scheduled UCBs:
Scheduled UCBs may crystallize the provisioning requirement arising on account of shifting of securities from HFT/AFS categories to the HTM category consequent to the issue of our guidelines dated 02.09.2004 and amortize the same over a maximum period of five years commencing from the accounting year ending 31.03.2005, with a minimum of 20 % of such amount, each year.
II. Non Scheduled UCBs:
Shifting of securities from HFT/AFS categories to the HTM category by Non-Scheduled UCBs consequent to the issue of the circular dated 02.09.2004 may be done at book value, subject to the following conditions:
(a) In case the book value is higher than the face value, the difference between the book value and the face value i.e., the premium may be amortized in equal installment over the period remaining to maturity. If the security was obtained at a discount to face value, the difference should be booked as profit only at the time of maturity of the security.
(b) The securities transferred under this special dispensation should be kept separately under the HTM category, and should not be transferred back to the AFS/HFT category in future as per the extant instructions on transfer of securities from HTM category.
(c) In normal course, such securities under HTM category should not be sold in the market and are to be redeemed on maturity only. However, in case of exceptional circumstances if such securities are to be sold, profit/loss on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter, the profit if any, should be appropriated to the ‘Capital Reserve ’.
(d) The banks were advised to build up sufficient provisions and adhere to extant investment norms for UCBs by 31.03.2009 without any relaxations.
It may be noted that the above relaxation is s a one time measure for the accounting year ended March 31, 2005 and for all fresh investments made on or after 01.04.2005, extant guidelines should be followed. The banks are not allowed to write back provisions already made on investments as on 31.03.2004.
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