Reserve Bank of India issues FAQs clarifying commercial banks’ investment portfolio classification, valuation and transition treatment

The Reserve Bank of India has published Frequently Asked Questions to clarify selected aspects of its 2023 Directions on the classification, valuation and operation of commercial banks’ investment portfolios. The clarifications apply to all commercial banks excluding regional rural banks, and the Directions will be updated to reflect the FAQs and consequential changes. Key points include HTM classification for bonds with put options where contractual cash flows meet the SPPI criterion and the bank intends to hold to maturity, while exercise of a put option is generally treated as a sale out of HTM unless triggered by events such as a credit-rating downgrade or counterparty default. On measurement, investments are to be recognised at fair value on initial recognition, with acquisition cost presumed to equal fair value unless facts indicate a material difference, and premiums or discounts are to be amortised over residual contractual maturity, including for callable or puttable securities, with perpetual debt amortised to the earliest call date. The FAQs also partially modify the treatment of instruments received on conversion of principal and or interest into equity or debt, clarifying that classification into HTM, AFS or FVTPL including HFT is determined at initial recognition while asset classification and provisioning follow the originating loan, and that non-performing investments must be segregated within their category for valuation netting purposes. On transition as of March 31, 2024 and April 1, 2024, the guidance covers revised carrying values and reserve adjustments for reclassifications, the fair value based treatment for non-interest bearing non-transferable special Government of India recapitalisation securities, and requires net unrealised gains on Level 3 instruments transferred to reserves at transition to be deducted from CET 1 capital. The Reserve Bank of India indicated it will update the 2023 Directions to incorporate these FAQs and related consequential amendments.