RBI/2006-2007/334
DBOD.BP.BC.
87 /21.04.141/ 2006-07 April
20, 2007 All
Scheduled Commercial Banks
(excluding Regional Rural Banks) Dear
Sir, Prudential
Norms for Classification, Valuation
and Operation of Investment Portfolio by
Banks Please
refer to our Master Circular on the above subject DBOD.
No. BP.BC. 14/ 21.04.141/ 2006-07, dated July 1, 2006. In terms of these guidelines
a bank may classify a security in the Held to Maturity (HTM) category either at
the time of acquisition or at the time of shifting from the AFS (Available For
Sale) category. In terms of paragraph 3.1 (i) of the above Master Circular, securities
included in the HTM category need not be marked to market and will be carried
in the books at acquisition cost. The securities shifted from the AFS category
will be held in the HTM category at the least of acquisition cost or book value
or market value of the security at the time of shifting. In case the acquisition
cost of the securities included under HTM category (including the value at which
the security was shifted from the AFS category) is more than the face value, the
premium should be amortised over the period remaining to maturity. 2.
It is observed that banks are adopting different accounting methods for amortising
the premium in respect of their HTM securities. Banks may refer to the format
of the balance sheet and profit and loss account prescribed in the Third Schedule
to the Banking Regulation Act, 1949 which indicate the accounting of loss on revaluation
of investments. Accordingly banks should: (a)
Reflect the amortised amount during an accounting period in the Profit and Loss
account of the bank in "Schedule 14 – Other Income: Item III – Profit on
revaluation of investment" as a deduction. (b)
The book value of the security should be reduced to the extent of the amount amortised
during the relevant accounting period. 3.
With a view to bringing about uniformity in the accounting of this aspect, it
is re-iterated that banks should adopt the correct accounting methodology while
finalizing their financial statements, including the statements for the year ended
March 31, 2007. Yours
faithfully, (Prashant
Saran)
Chief General Manager-in-Charge |