Description
This is a presentation explains investment portfolio of a bank i.e. where the banks invests most of its funds. It explains Regulatory Norms for Investment in Non-SLR Securities
Course : Treasury Management
(Presentation No. 2)
Investment Portfolio of a Bank
Approved Portfolio (SLR Securities) * Treasury Bills of Varying Maturities * Central Government Dated Securities * State Government Dated Securities * Other Trustee Securities
Unapproved Securities (Non-SLR Securities) * Shares (both of equity as well as pref.shares) * PSU bonds * Debentures/bonds issued by private sector enterprises * Other investments such as Commercial papers and units of mutual funds etc. * Securitised papers (mortgage backed securities/securitisation papers)
Regulatory Norms for Investment in Non-SLR Securities
? Banks should not invest in non-SLR securities of original maturity of less than one year, other than commercial paper and certificate of deposits ? Banks should undertake due diligence in respect of investments in securities. ? Banks must not invest in unrated non-SLR securities (debt instruments issued by companies shall carry a credit rating of not less than investment grade from a credit rating agency registered with the SEBI).
? Banks investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities as on March 31, of the previous years.
The entire investment portfolio of a bank can be classified into three categories:
? Held to Maturity
? Available for Sale
? Held for Trading
**
However in the balance sheet the investments will continue to be disclosed as per the existing six classifications as below : (a) Government securities; (b) Other approved securities; (c) shares; (d) Debentures and bonds; (e) Subsidiaries/joint ventures; and (f) Others (CP, Mutual Funds Units, etc.) _________________________ ** This classification is effective from September 30, 2000. Earlier investment were required to be classified into two categories: permanent and current.
?
The securities acquired by the bank with the intention to hold them upto maturity will be classified under Held to Maturity
?
The securities acquired by the bank with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading.
?
The securities which do not fall within the above two categories will be classified under available for sale
Held to Maturity ? ? ? The investments is included under ‘Held to Maturity’ should not exceed 25% of the bank’s total investment The banks may include at their, discretion under held to maturity category securities less than 25% of total investment Banks have been allowed in September 2, 2004 to exceed the limit of 25%of total investment under esteemed category provided :
- The excess comprises only of SLR securities and the total SLR securities in the esteemed category is not more than 25% of DTL as on last Friday of the second preceding fortnight
? Profit on sale of investments in this category should be first taken to the P & L A/c and thereafter be appropriated to the ‘capital Reserve/Account’. Loss on sale will be recognised in the P & L A/C.
? Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year.
Available for Sale and Held for Trading
? The basis will have the freedom to decide on the extent of holding under Available for Sale and Held for Trading categories.
? This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position etc.
?
The securities classified under Held for Trading Category are to be sold within 90 days, if the bank is not able to sell the security within 90 days, the security should be shifted to the Available for Sale category. Profit or loss on sale of investment in both the categories will be taken to the P&L A/C.
?
Shifting Among the Categories ? Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. Banks may shift investments from available for sale category to held for Trading category with the approval of their Board of Directors/ALCO investment committee. Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions.
?
1. 2. 3. 3. 4.
Investment Management Process Setting investment objectives Establishing investment policy Selecting the portfolio strategy Selecting the securities/assets Measuring and evaluating performance
Objectives of Investment Function To improve average yield on total portfolio. To maximise capital or trading profit through trading in securities. To adjust the maturity of securities in relation to the maturity pattern of deposits and other liabilities. To manage various risks in investment such as interest rate risk, credit risk, etc., within the acceptable limit.
(a) (b) (c)
(d)
Investment Policy should Cover the Following Aspects
1. Separate investment policy statements for managing portfolio of approved and unapproved securities highlighting the attitude, approach and commitment of the top management Suitable norms for deploying the funds in various securities Suitable guidelines for managing various risks in investment portfolio
2. 3.
4.
Suitable guidelines for conducting transactions in securities such as outright sale and/or purchase of securities, switch deals and repos etc.
5.
Criteria to be used for classification of the entire investment portfolio into three categories held to maturity, available for sale and held for maturity. Norms and procedures to be followed for valuation of securities within the RBIs broad guidelines A graphical organisational flowchart of investment function indicating responsibilities and delegation of powers for carrying out the transactions in securities at different hierarchy levels and communication channels. Role of front, mid and back office and interrelationship between them. Infrastructure support for effective investment decisions such as softwares, creation of data bank etc.
6. 7.
8. 10.
Selecting the Security/Asset
? ? ? ? ?
Conforming to Investment Policy Yielding Optimum Return with Lowest Risk Utility - for Liquidity Management Effect on Capital Risk Asset Ratio (CRAR) Effect on Overall Return on Portfolio
Type of Securities (Bonds) (Major Parameters)
Coupon Based Issuer Based
Fixed Income Floating Rate Zero Coupon
Gilts PSUs AIFIs/Banks/Corporate
Maturity Money Market (< 1 Yr) Medium Term (2-5 yrs) Long Term (. 5 yrs)
Placement Basis Private placement Public Offer
Investment Decisions
Primary Market
Acquire the Security (i) Under auction system (ii) In response to public issue/ advertisement (iii) Through private placement
Secondary Market
Maturity
Switch Deals Sell
Yield
Composition
Buy & hold investment strategy (Held to Maturity Category)
Buy Buy & sell investment strategy (Trading portfolio)
How to pursue active investment strategy
Establishment of system for risk management
Issues in Managing Investment Portfolio
Participation in the auction of Treasury Bills and Central Govt. dated securities
Setting up of norms for performances measuring and evaluating performance
Setting of internal controls Concurrent audit of securities transactions
TRADING PORTFOLIO: Characteristics, Conditions and Other Related Issues
TRADING PORTFOLIO: Characteristics, Conditions & Other Related Issues
? Securities are traded continuously with the intention to trade for taking advantage of the short term price/interest rate movements.
? Profit or loss on sale of security forming part of trading portfolio can be taken to P&L A/C
?Such securities will have to be Marked To Market more frequently ( either daily, weekly, monthly or quarterly basis.) DECIDE ABOUT SIZE OF PORTFOLIO ?Bank’s strategy for using the trading portfolio as a source of non-interest income. (a) Higher expectation of profit Higher will be the trading portfolio (b) Quantum of profit is linked with the size of portfolio.
Higher appetite For risk ? How is the market? Stable market Volatile market ? If short selling is permitted
Higher will be the trading portfolio Increase the size of portfolio Reduce the of size of portfolio Reduce the size of portfolio
? Strategies of other banks If other banks and PDs have large size of trading portfolio, then market is likely to provide more liquidity to the securities and therefore increase the size of portfolio.
? Opportunities in the market for trading in securities in terms of number of liquid securities. Higher the opportunities , higher will be the size of trading of portfolio.
? The bank’s policy of using the trading portfolio in managing ALM mismatch.
Higher the reliance on trading portfolio for the short term ALM mismatches, higher will be the size of the trading portfolio.
SIZE OF PORTFOLIO ?In terms of absolute amount---- like 50 crore 100 or 500 crore ?In terms of percentage of total portfolio like-------- 10 % , 50%, 100%
Composition of Trading Portfolio
? Depend on the who are the clients? If clients are PF, Insurance companies then, better have longer tenor securities. If clients are PD’s & Investment banks then, have short dated securities. ? Securities which are actively traded ? Frequency of trading per day - Individual security turnover ? Prevailing conditions in the market If interest rates are expected to move up then, have short dated and high yield securities. If interest rates are expected to come down then, have long dated securities.
? Holding period?
How long such securities are going to be held?
? Valuation / Mark to Market
The securities in the trading portfolio have to be valued scrip-wise using a market value on more frequently as per the guidelines issued by the Central Bank of country . Depreciation if any shall be provided for in the books of accounts while appreciation, if any, shall be ignored.
? Risk Management and Control ? Need to avoid concentration to a single security or few securities. ? Fix a limit on the duration as well as modified duration of a trading portfolio. ? Need to introduce Value-at-Risk as a tool for market risk management. ? Each dealer need to be allowed to deal in a marketable lot of Rs.5 or 10 or 25 crore ? In order to limit the losses in adverse market conditions, stop loss or cut loss limits need to be prescribed.
Valuation Held to Maturity Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. Available for Sale The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Securities under this category shall be valued scrip-wise and depreciation/appreciation shall be aggregated for each classification referred to in item 2(i) above. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. The book value of the individual securities would not undergo any change after the making of market.
Held to Trading The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. Consequently, the book value of the individual securities in the category would also not undergo any change after marking to market. Investment Fluctuation Reserve With a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments, banks were advised to build up investment. Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment portfolio within a period of 5 years. Banks were advised in October 2005 that, if they have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT and AFS category as on March 31, 2006, they would be permitted to treat the entire balance in the IFR as Tier I capital.
Market Value The ‘market value’ for the purpose of periodical valuation of investments included in the Available for Sale and Held for Trading categories would be the market price of the scrip as available form the trades/quotes on the stock exchanges, SGL account transactions, price list of RBI, prices declared by Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically. Unquoted SLR Securities Central Government Securities Banks should value the unquoted Central Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA at periodical intervals.
Treasury Bills should be valued at carrying cost
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. 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. Unquoted Non-SLR Securities Debentures/Bonds This 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 unrated debentures/bonds should not be less than the rate applicable to rated debentures/bonds of equivalent maturity. The mark-up for the unrated debentures/bonds should appropriately reflect the credit risk borne by the bank. (c) Where the debenture/bond is quoted and there have been transactions within 15 days prior to the valuation date, the value adopted should not be higher than recorded on the stock exchange.
Preference Shares The valuation of preference shares should be on YTM basis. The preference shares will be issued by companies with different ratings. These will be valued with appropriate mark-up over the YTM rates for Central Government securities put out by the PDAI/FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the preference shares by the rating agencies subject to the following : - The YTM rate should not be lower than the coupon rate/YTM for a Government of India loan of equivalent maturity. - Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined on YTM should be discounted by at least 15% if arrears are for one year, and more if arrears are for more than one year.
- The preference share should not be valued above its redemption value.
Equity Shares The equity shares in the bank’s portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. 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 or valuation). In case the latest balance sheet is not available the share are to be valued at Re. 1 per company.
Mutual Funds Units Investment in quoted Mutual Fund Units should be valued as per Stock Exchange quotations. Investment in un-quoted Mutual Fund Units is to be valued on the basis of the latest re-purchase price declared by the Mutual Fund in respect of each particular Scheme. In case of funds with a lock-in period, 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. Wherever the re-purchase price is not available the Units could be value at the NAV of the respective scheme. Commercial Paper Commercial paper should be valued at the carrying cost.
Internal Assessment
Since non-SLR securities are mostly in the form of credit substitutes, banks have to ? Subject all their investment proposals relating to non-SLR securities to credit appraisal on par with their credit proposals. ? Make their own internal credit analysis and rating even in respect of rated issues. ? Strengthen their internal rating systems with a view to ensure continuous monitoring of the rating migration of the issuers.
doc_193405839.ppt
This is a presentation explains investment portfolio of a bank i.e. where the banks invests most of its funds. It explains Regulatory Norms for Investment in Non-SLR Securities
Course : Treasury Management
(Presentation No. 2)
Investment Portfolio of a Bank
Approved Portfolio (SLR Securities) * Treasury Bills of Varying Maturities * Central Government Dated Securities * State Government Dated Securities * Other Trustee Securities
Unapproved Securities (Non-SLR Securities) * Shares (both of equity as well as pref.shares) * PSU bonds * Debentures/bonds issued by private sector enterprises * Other investments such as Commercial papers and units of mutual funds etc. * Securitised papers (mortgage backed securities/securitisation papers)
Regulatory Norms for Investment in Non-SLR Securities
? Banks should not invest in non-SLR securities of original maturity of less than one year, other than commercial paper and certificate of deposits ? Banks should undertake due diligence in respect of investments in securities. ? Banks must not invest in unrated non-SLR securities (debt instruments issued by companies shall carry a credit rating of not less than investment grade from a credit rating agency registered with the SEBI).
? Banks investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities as on March 31, of the previous years.
The entire investment portfolio of a bank can be classified into three categories:
? Held to Maturity
? Available for Sale
? Held for Trading
**
However in the balance sheet the investments will continue to be disclosed as per the existing six classifications as below : (a) Government securities; (b) Other approved securities; (c) shares; (d) Debentures and bonds; (e) Subsidiaries/joint ventures; and (f) Others (CP, Mutual Funds Units, etc.) _________________________ ** This classification is effective from September 30, 2000. Earlier investment were required to be classified into two categories: permanent and current.
?
The securities acquired by the bank with the intention to hold them upto maturity will be classified under Held to Maturity
?
The securities acquired by the bank with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading.
?
The securities which do not fall within the above two categories will be classified under available for sale
Held to Maturity ? ? ? The investments is included under ‘Held to Maturity’ should not exceed 25% of the bank’s total investment The banks may include at their, discretion under held to maturity category securities less than 25% of total investment Banks have been allowed in September 2, 2004 to exceed the limit of 25%of total investment under esteemed category provided :
- The excess comprises only of SLR securities and the total SLR securities in the esteemed category is not more than 25% of DTL as on last Friday of the second preceding fortnight
? Profit on sale of investments in this category should be first taken to the P & L A/c and thereafter be appropriated to the ‘capital Reserve/Account’. Loss on sale will be recognised in the P & L A/C.
? Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year.
Available for Sale and Held for Trading
? The basis will have the freedom to decide on the extent of holding under Available for Sale and Held for Trading categories.
? This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position etc.
?
The securities classified under Held for Trading Category are to be sold within 90 days, if the bank is not able to sell the security within 90 days, the security should be shifted to the Available for Sale category. Profit or loss on sale of investment in both the categories will be taken to the P&L A/C.
?
Shifting Among the Categories ? Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. Banks may shift investments from available for sale category to held for Trading category with the approval of their Board of Directors/ALCO investment committee. Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions.
?
1. 2. 3. 3. 4.
Investment Management Process Setting investment objectives Establishing investment policy Selecting the portfolio strategy Selecting the securities/assets Measuring and evaluating performance
Objectives of Investment Function To improve average yield on total portfolio. To maximise capital or trading profit through trading in securities. To adjust the maturity of securities in relation to the maturity pattern of deposits and other liabilities. To manage various risks in investment such as interest rate risk, credit risk, etc., within the acceptable limit.
(a) (b) (c)
(d)
Investment Policy should Cover the Following Aspects
1. Separate investment policy statements for managing portfolio of approved and unapproved securities highlighting the attitude, approach and commitment of the top management Suitable norms for deploying the funds in various securities Suitable guidelines for managing various risks in investment portfolio
2. 3.
4.
Suitable guidelines for conducting transactions in securities such as outright sale and/or purchase of securities, switch deals and repos etc.
5.
Criteria to be used for classification of the entire investment portfolio into three categories held to maturity, available for sale and held for maturity. Norms and procedures to be followed for valuation of securities within the RBIs broad guidelines A graphical organisational flowchart of investment function indicating responsibilities and delegation of powers for carrying out the transactions in securities at different hierarchy levels and communication channels. Role of front, mid and back office and interrelationship between them. Infrastructure support for effective investment decisions such as softwares, creation of data bank etc.
6. 7.
8. 10.
Selecting the Security/Asset
? ? ? ? ?
Conforming to Investment Policy Yielding Optimum Return with Lowest Risk Utility - for Liquidity Management Effect on Capital Risk Asset Ratio (CRAR) Effect on Overall Return on Portfolio
Type of Securities (Bonds) (Major Parameters)
Coupon Based Issuer Based
Fixed Income Floating Rate Zero Coupon
Gilts PSUs AIFIs/Banks/Corporate
Maturity Money Market (< 1 Yr) Medium Term (2-5 yrs) Long Term (. 5 yrs)
Placement Basis Private placement Public Offer
Investment Decisions
Primary Market
Acquire the Security (i) Under auction system (ii) In response to public issue/ advertisement (iii) Through private placement
Secondary Market
Maturity
Switch Deals Sell
Yield
Composition
Buy & hold investment strategy (Held to Maturity Category)
Buy Buy & sell investment strategy (Trading portfolio)
How to pursue active investment strategy
Establishment of system for risk management
Issues in Managing Investment Portfolio
Participation in the auction of Treasury Bills and Central Govt. dated securities
Setting up of norms for performances measuring and evaluating performance
Setting of internal controls Concurrent audit of securities transactions
TRADING PORTFOLIO: Characteristics, Conditions and Other Related Issues
TRADING PORTFOLIO: Characteristics, Conditions & Other Related Issues
? Securities are traded continuously with the intention to trade for taking advantage of the short term price/interest rate movements.
? Profit or loss on sale of security forming part of trading portfolio can be taken to P&L A/C
?Such securities will have to be Marked To Market more frequently ( either daily, weekly, monthly or quarterly basis.) DECIDE ABOUT SIZE OF PORTFOLIO ?Bank’s strategy for using the trading portfolio as a source of non-interest income. (a) Higher expectation of profit Higher will be the trading portfolio (b) Quantum of profit is linked with the size of portfolio.
Higher appetite For risk ? How is the market? Stable market Volatile market ? If short selling is permitted
Higher will be the trading portfolio Increase the size of portfolio Reduce the of size of portfolio Reduce the size of portfolio
? Strategies of other banks If other banks and PDs have large size of trading portfolio, then market is likely to provide more liquidity to the securities and therefore increase the size of portfolio.
? Opportunities in the market for trading in securities in terms of number of liquid securities. Higher the opportunities , higher will be the size of trading of portfolio.
? The bank’s policy of using the trading portfolio in managing ALM mismatch.
Higher the reliance on trading portfolio for the short term ALM mismatches, higher will be the size of the trading portfolio.
SIZE OF PORTFOLIO ?In terms of absolute amount---- like 50 crore 100 or 500 crore ?In terms of percentage of total portfolio like-------- 10 % , 50%, 100%
Composition of Trading Portfolio
? Depend on the who are the clients? If clients are PF, Insurance companies then, better have longer tenor securities. If clients are PD’s & Investment banks then, have short dated securities. ? Securities which are actively traded ? Frequency of trading per day - Individual security turnover ? Prevailing conditions in the market If interest rates are expected to move up then, have short dated and high yield securities. If interest rates are expected to come down then, have long dated securities.
? Holding period?
How long such securities are going to be held?
? Valuation / Mark to Market
The securities in the trading portfolio have to be valued scrip-wise using a market value on more frequently as per the guidelines issued by the Central Bank of country . Depreciation if any shall be provided for in the books of accounts while appreciation, if any, shall be ignored.
? Risk Management and Control ? Need to avoid concentration to a single security or few securities. ? Fix a limit on the duration as well as modified duration of a trading portfolio. ? Need to introduce Value-at-Risk as a tool for market risk management. ? Each dealer need to be allowed to deal in a marketable lot of Rs.5 or 10 or 25 crore ? In order to limit the losses in adverse market conditions, stop loss or cut loss limits need to be prescribed.
Valuation Held to Maturity Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. Available for Sale The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Securities under this category shall be valued scrip-wise and depreciation/appreciation shall be aggregated for each classification referred to in item 2(i) above. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. The book value of the individual securities would not undergo any change after the making of market.
Held to Trading The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. Consequently, the book value of the individual securities in the category would also not undergo any change after marking to market. Investment Fluctuation Reserve With a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments, banks were advised to build up investment. Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment portfolio within a period of 5 years. Banks were advised in October 2005 that, if they have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT and AFS category as on March 31, 2006, they would be permitted to treat the entire balance in the IFR as Tier I capital.
Market Value The ‘market value’ for the purpose of periodical valuation of investments included in the Available for Sale and Held for Trading categories would be the market price of the scrip as available form the trades/quotes on the stock exchanges, SGL account transactions, price list of RBI, prices declared by Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically. Unquoted SLR Securities Central Government Securities Banks should value the unquoted Central Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA at periodical intervals.
Treasury Bills should be valued at carrying cost
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. 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. Unquoted Non-SLR Securities Debentures/Bonds This 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 unrated debentures/bonds should not be less than the rate applicable to rated debentures/bonds of equivalent maturity. The mark-up for the unrated debentures/bonds should appropriately reflect the credit risk borne by the bank. (c) Where the debenture/bond is quoted and there have been transactions within 15 days prior to the valuation date, the value adopted should not be higher than recorded on the stock exchange.
Preference Shares The valuation of preference shares should be on YTM basis. The preference shares will be issued by companies with different ratings. These will be valued with appropriate mark-up over the YTM rates for Central Government securities put out by the PDAI/FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the preference shares by the rating agencies subject to the following : - The YTM rate should not be lower than the coupon rate/YTM for a Government of India loan of equivalent maturity. - Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined on YTM should be discounted by at least 15% if arrears are for one year, and more if arrears are for more than one year.
- The preference share should not be valued above its redemption value.
Equity Shares The equity shares in the bank’s portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. 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 or valuation). In case the latest balance sheet is not available the share are to be valued at Re. 1 per company.
Mutual Funds Units Investment in quoted Mutual Fund Units should be valued as per Stock Exchange quotations. Investment in un-quoted Mutual Fund Units is to be valued on the basis of the latest re-purchase price declared by the Mutual Fund in respect of each particular Scheme. In case of funds with a lock-in period, 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. Wherever the re-purchase price is not available the Units could be value at the NAV of the respective scheme. Commercial Paper Commercial paper should be valued at the carrying cost.
Internal Assessment
Since non-SLR securities are mostly in the form of credit substitutes, banks have to ? Subject all their investment proposals relating to non-SLR securities to credit appraisal on par with their credit proposals. ? Make their own internal credit analysis and rating even in respect of rated issues. ? Strengthen their internal rating systems with a view to ensure continuous monitoring of the rating migration of the issuers.
doc_193405839.ppt