To generate income in the banking book so as to attain optimum return on the funds employed. To manage the trading book and undertake trading activities. Maintain the required SLR. Investment is as important as Loans & Advances OBJECTIVES OF THE INVESTMENT FUNCTION
Surplus Funds Total working fund Less outstanding loans and advances Less commitments – fixed assets Less bank guarantee invoked Less CRR & SLR requirements Balance is the surplus (Determine whether of Short term or long term)
Monitoring of Surplus Funds ensure submission of daily statement by branches quick consolidation at HO take appropriate decision to use the funds profitably. ensure retention limits under cash and C/A are adhered to
Investment Policy Objectives of Investment policy 1.Types of investments 2.Delegation of power for investment 3.Procedure for investments 4.Valuation and other accounting procedures 5.Internal control 6.Review and reporting
– contd. 7. Limit according to ratings 8. Operational guidelines 9. AUTHORISATION- short term to PD / limit fix for investment committee 10. Cut loss policy is a must 11. To meet statutory requirements 12. To manage surplus funds after meeting statutory requirements 13. To maximise investment income within reasonable limits of risks 14. To provide for adequate liquidity
To sum up: RRBs should - Identify their surplus funds Formulate investment policy duly approved Monitor the implementation Risk by choice and not by chance Size of investment Rating of investments Provision required Exposure norm compliance
Role of Board of RRBs Regulatory concern Approve ‘Investment Policy’ Fix prudential limits subject to existing limits prescribed by RBI Proper risk management systems. Periodical review of investments Ensure adherence to RBI guidelines Ensure valuation of investments and provision for mark-to-market Ensure concurrent audit of transactions
Types of Investments SLR & Non – SLR investments
SLR Investments GOI Securities Treasury bills State Govt. Securities Central Govt. guaranteed bonds State Govt. guaranteed bonds Other approved securities
Government Security Definition : Govt. Security is a tradeable instrument issued by the Central or State Govts. Such Securities are both long term (> 1 yr) & short term (<= 1 yr). a.Treasury bills (<= 1 yr) b.Dated government securities (> 1 yr)
Types of dated securities Fixed rate bonds Floating rate bonds Zero Coupon bonds Capital indexed bonds/Inflation indexed bonds Bond with call/put Options Special Securities e.g. Oil bonds, fertilizer bonds, Power bonds, etc.
Debt Market – Segmental Position S.No.ParticularsO/s amt (Rs. Cr.) (Jun 30,2012) %age to total 1.Dated G-Secs29,06, T-Bills328, SDLs765, Corporate Bonds 10,88, Total50,89,
Permitted Non-SLR Investments a)Bonds of Public Sector Undertakings b)Bonds of All India Financial Institutions c)Unsecured redeemable bonds by Nationalised Banks d)Infrastructure bonds of AFIs e)Mututal Funds upto 5% of incremental deposits of previous year. f)Boards of RRBs to fix prudential limits for (a) to (d)
Regulatory Requirement RRBs Banks should not invest in Non SLR debt securities of original maturity of < 1 yr. Must not invest in unrated debt securities, unlisted securities, unlisted shares of All India Financial Institutions Debt securities should carry credit rating of not less than investment grade by rating agency.
SLR Investment As per Sec. 24 of BR Act,1949, RRBs are required to keep minimum 23% of its Net Demand and Time Liabilities in cash, gold & SLR securities The value of assets shall not, at the close of business on any day, be less than 23% of the total NDTL in India as on the last Friday of the second preceding fortnight, valued in accordance with the method of valuation specified by RBI from time to time
SLR Investment – contd.. Components of SLR: Cash-any balance maintained by RRB with RBI in excess of the balance maintained by it under Section 42 of the RBI Act,1934 and net balances in current accounts with other scheduled commercial banks in India Gold- valued at a price not exceeding the current market price investment in unencumbered SLR securities- dated Securities, Treasury Bills, dated securities to be issued in future by GoI under the market borrowing programme and MSS, securities under SDL of the State Govt. issued from time to time under the market borrowing programme with SLR status Any other instrument as may be notified by RBI- For instance, Cash Management Bills (Cir. No. 17 dated ) RRBs to hold G-sec in demat for only
Not approved securities Bonds/securities/debentures/shares issued by Public Sector undertakings, joint stock companies, units of UTI/Mutual Funds, etc. Kisan Vikas Patras & Indira Vikka Patras are not approved sec. for the purpose of maintenance of SLR. (Cir.no. 1A dated & 16 A dated )
Valuation of SLR investment Entire investment portfolio of SLR securities is to be classified under ‘Held to Maturity’ category with valuation on book value basis and amortisation of premium, if any, over the life of the securities. In terms of recommendations of Chakrabarty Committee (on recapitalisation & improvement of CRAR), exemption marking to market granted to RRBs has been extended by three years i.e. for the financial years , and Accordingly, RRBs will have the freedom to classify their entire investment portfolio of SLR securities under ‘Held to Maturity’ for the financial years , and
Non-SLR investment- Till end of 1994, the RRBs were not permitted any avenues to invest their surplus funds in other than investment for SLR purposes Many RRBs were incurring losses. Of the 196 RRBs, 173 reported losses in For restructuring of RRBs many policy initiatives were taken like Recapitalisation, Rationalisation of branch network, Operational flexibility in lending, Relaxation from target group lending, Technological and Managerial initiatives etc. On the recommendations of Bhandari Committee, 1994, RBI permitted RRBs to access to profitable avenues for investment of their non-SLR surpluses. Consequently, RRBs were given operational flexibility in the areas of investment. Non-SLR investment would include investments under the following categories in Schedule 8 to the balance sheet Shares, bonds & debentures and others (MF)
Non-SLR Invest.-Avenues & Ceilings Sponsor banks to aid and advise on choice of investment avenues, availability of instruments, yield, etc. But, investment decisions to be taken by the BOD of RRB Quarterly review by sponsor bank on portfolio Annual review of the rate of return on investments
Non-SLR Invest.-Avenues & Ceilings December 13, Revised Guidelines RBI broad based the investment avenues and accorded parity to RRBs with commercial banks in regard to the choice of investment avenues. In supersession of earlier instructions, RRBs were permitted to invest in Shares & debentures of Corporates Investment in bonds of PSU & AIFIs and units of mutual funds unsecured bonds floated by Nationalised Banks Infrastructure Bonds floated by AFIs (No ceiling) Ceiling- up to 5% of the incremental Deposits of the bank during the previous Year, including buying in secondary market
Non—SLR Invest.- contd. The maximum investment should satisfy the single exposure norms prescribed from time to time (i.e. the loans granted to a company together with investments made in its share by the RRBs should not exceed 15% of the owned funds of the RRB or 15% of the paid up share capital of the company whichever is less)- Group Exposure 40% of the owned funds Sec.19(2) of BR Act, 1949 to be complied with viz. no Banking Company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent of the paid-up share capital of that company or thirty per cent of its own paid-up share capital under reserves, whichever is less
Non—SLR Invest.- contd. Investment in Tier-II Capital Bonds issued by sponsor banks or other banks /FIs. The maximum exposure of an RRB in total Tier-II bonds of all banks is restricted to 10% of the owned fund of the RRB. (Cir. no. 30 dated ) RRBs can also enter into ready forward transactions (REPOs) in G-sec with SGL / CSGL account holders, subject to the conditions specified in IDMD Circular No. IDMD/ PDRS/4779/ / dated May 11, 2005
Non—SLR Invest.- contd. RRBs can participate in CBLO market with the settlement undertaken through their Gilt Account RRBs desirous of participating in repos / CBLO market may approach the sponsor banks for guidance. Sponsor banks, in turn, may actively facilitate such access and provide necessary training to RRB staff. Cir. no. 57 dated Buying can be made through primary market or secondary market. Money Market Instruments - Permitted to invest in Commercial Paper and Certificate of Deposit
Deployment of surplus Non-SLR funds in credit portfolio of sponsor banks January 25,1995 : RRBs can deploy a part of their surplus non-SLR funds in the credit portfolios of sponsor banks through non-risk sharing Inter-Bank Participation Certificates to be issued by the latter on agreed terms and conditions May 29,1997 : in risk sharing IBPC also subject to overall ceiling of 15% of fresh lending during a year (made by RRB) single party/group exposure norms to be observed
Prudential Guidelines on Investment in Non-SLR Debt securities –Dos & Don’ts (Feb 2004) Regulatory requirements: Banks should not invest in Non-SLR debt instruments of original maturity of less than one year other than Commercial Paper & Cert of Deposit Banks to undertake due diligence and have to ensure that “exempted” categories are not financed through non SLR securities Banks not to invest in unrated debt securities, unlisted securities and unlisted shares of AIFIs Banks should make fresh investments only in listed debt securities which comply with SEBI requirement
Prudential Guidelines on Investment in Non-SLR Debt securities- Dos & Don’ts Internal assessments: All Non-SLR investment proposals have to go through the rigours of credit appraisal route on par with their credit proposals Banks to make their own internal credit analysis and rating Internal rating systems should be strengthened Regularly monitoring /tracking of the financial position of the issuer and the rating migration
Prudential Guidelines on Investment in Non-SLR Debt securities- Dos & Don’ts Fixing of prudential limits: BOD to fix prudential limits for their total investment in non-SLR securities subject to sub limits prescribed by RBI such as PSU bonds, AIFI bonds, nationalised banks’ bonds; infrastructure bonds (without ceiling) and UTI units (with ceiling) Banks should stipulate entry level minimum rating and industry-wise, maturity-wise, duration-wise, issuer-wise, etc. limits
Classification and valuation of investments RPCD Circulars dated September 4, 1992 and May 23, 1995 Investments should be shown in the balance sheet net of depreciation Permanent investments to be valued at cost and in case the cost price is higher than the face value, the premium to be amortized over the remaining period of maturity; If cost price is less than the face value, the difference should be ignored and not to be taken to income account Current investments should be carried at lower of cost or market value on a consistent basis; valuation to be done on a quarterly basis Gain on sale of permanent investments to “Capital Reserve” Account and not to Investment Fluctuation Reserve Account.
Care All investments in securities other than approved securities should be classified under “Current” category Securities under “Current” category and should be valued at market price or cost whichever is less and depreciation should be provided for the shortfall, if any Investment decision to be taken by the Boards of RRBs and the Board may delegate powers to Chairman/Investment Committee for making investments which should be ratified by the former in the immediately following meeting
Care Responsibility should be fixed for administration of the investment portfolio Investment policy should take care of legal requirements, liquidity needs, etc. Treasury transactions should be separately subjected to a concurrent audit by internal auditors and this audit report should be placed before their Chief Executive once every month
CLASSIFICATION Held to Maturity Held for Trading Available for Sale
Held to Maturity Security acquired with the intention to hold them up to maturity The investment under HTM should not be >25% of RRBs total investment Relaxation provided if: Excess comprises of SLR securities & Total SLR securities held in HTM is not more than 25(now23) per cent of their DTL as on the last Friday of the second preceding fortnight
Held for Trading Securities acquired with the intention of short-term price/interest rate movements The investment in these securities is for a period of 90 days The security is acquired considering various aspects viz. basis of intent, trading stretegies, risk management capabilities, tax planning, manpower skills, capital position, etc.
Available for Sale All other securities which do not come under the head of HTM & HFT
Shifting among categories RRBs may shift investment to/from HTM only once and in the beginning of the year. Shifting from HFT to AFS is only in exceptional circumstances viz. tight liquidity conditions, extreme volatility, market becoming unidirectional, etc. Shifting from AFS to HFT only with the approval of the Board
Valuation HTM: Need not be marked to market AFS: marked to market at quarterly or more frequent intervals. The book value would not undergo change after revaluation. HFT: market to market at monthly or more frequent intervals. The book value would not undergo change after revaluation
Benefits of MTM The bank balance sheets will disclose the true value of assets held as part of investment portfolio. Transparency in this way would be welcome by International Community and rating agencies For a deeper and vibrant debt market. It would help elimination of the tendency to push some of the low yielding securities into 'permanent' category investments on which there could be a large valuation loss. Marking to market would encourage trading in securities held in the hitherto classified 'permanent' category.
Valuation of investments-contd. Market value of Quoted SLR & Non SLR securities: Market value would be the Market price of the scrip as available from: Trade quotes on the stock exchanges Price list of RBI Prices declared by PDAI and FIMMDA Value of Unquoted Non- SLR securities: All debentures/bonds should be valued on the YTM basis; they may belong to companies with different ratings These will be valued with appropriate mark up over the YTM rates of Central Govt securities as put out by PDAI/FIMMDA Mark up will be graded according to the ratings
Valuation of investment-contd. Equity Shares: At market price, if quoted, otherwise at break up value (excluding revaluation surplus) if latest balance sheet is available or Rs.1/- per company Mutual Funds Units: At market price, if quoted otherwise at repurchase price/Net Asset Value Please see our circular no. 37A dated
Transactions through brokers Limit of 5% for transactions through a single broker Inter bank transactions in securities through brokers prohibited except through NSE members 5% ceiling not applicable for transactions through PDs
Non-performing investment A non-performing investment (NPI), similar to a non-performing advance (NPA) is one where Interest / instalment (including maturity proceeds) is due and remains unpaid for more than 90 days The above would apply mutatis and mutandis to preference shares where the fixed dividend is not paid In the case of equity shares, in the event the investment in the shares of any company is valued at Re. 1 per company on account of the non- availability of the latest balance sheet, those equity shares would also be reckoned as NPI. Circular No. 66 dated 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 issuer would also be treated as NPI
Role of sponsor bank Sponsor Bank is required to aid and advise regarding choice of investment avenues RRBs should make references wherever necessary in respect of individual investment proposals only to sponsor banks References seeking instructions on proposals outside the policy framework or requiring change in policy may be made to RBI by sponsor banks with recommendations after due examination by them in context of prevailing policy in respect of their own bank The investment portfolio of the RRBs should be reviewed by sponsor bank on quarterly basis and a consolidated qualitative report submitted to RBI/NABARD as at the end of March every year (Cir. No. 57 dated )
Common Issues Maintenance of SLR funds in the shape of call/fixed deposits with sponsor banks - The proposal of RRBs for restoration of the freedom to was re-examined. But, this suggestion was not favoured as it is apprehended that too much interlocking of funds in the banking system is not desirable considering that RRBs, post amalgamation, have emerged as large institutions Imposition of investment decisions by sponsor banks- RRBs need to undertake investments by themselves and may be enabled to have access to investment avenues/channels of investment other than the sponsor bank so as to secure better returns without sacrificing safety concerns
Issues-contd. IBPC and sale of loan assets- References from Associations/Federations-Against IBPC and sale of loan assets. RRBs should not incur any loss because of these transactions. Window dressing of balance sheet of other banks through this route should be discouraged. Adequate funds for Financial Inclusion Plan- RRBs should have funds for furthering financial inclusion drive. RRBs share in rural credit needs further improvement. Now, RRBs are also required to make Board approved Financial Inclusion Plan Investment Deposit Ratio should be decreased- CD ratio needs to be increased. Emphasis should be on flow of resources from the urban to rural areas.CD ratio should be increased and narrow banking should be avoided. Seize the opportunity to deploy more funds in loaning like consortium advances with sponsor banks.
CD & ID Ratio YearCD RatioID Ratio
Capacity Building The Committee on Recapitalisation of RRBs for improving the CRAR (Chairman: Dr. K.C.Chakrabarty)- a ‘capacity building & organisation development fund’ may be set up for RRBs with a corpus of Rs. 100 crore for providing capacity building support to RRBs GoI has accepted the recommendation and we hope that this fund will help RRBs to increase their expertise in investment matters also All India (RRBs) : SLR=Rs 4795 cr, Non-SLR=Rs 48025cr
Regulatory Concerns Adherence to guidelines a) Investment committee Fix stop-loss/cut profit /broker limits Fix the defeasance period b) Periodical reviews- Qtrly by sponsor bank/Half-yearly by RRB. c) Concurrent Audit-monthly. d)Proper accounting- NPI,Capital reserve.
Dos & DON’Ts Do fix internal limit for total NSLR. Fix minimum entry-level rating norms. Follow rigorous appraisal mechanism. Half-yearly review reports to be submitted to NABARD/RBI. Proper accounting
Don’ts Should not invest in NSLR securities of original maturity less than one year, except CP/CD. Should not invest in unrated/ unlisted securities.
Deficiencies observed Investment Policy not revised periodically Half-yearly review not undertaken & put up to Boards Delay in furnishing review notes to NABARD RO Single exposure norms exceded
Deficiencies observed (RRBs) (Out of 62 RRBs as of Half Year ended March 31, 2012 ) RRBs had not undertaken the half-yearly review of investment Many RRBs did not have approved panel of brokers. One GB has invested more than 10% of their own fund in Tier II Bonds issued by Sponsor bank or other banks/Fis No concurrent audit is in place in 10 RRBs for investment related transaction. RRBs have not submitted quarterly certificate indicating the investment held by the bank. Two RRBs exceeded the ceiling of investments on Non-SLR surplus resources. RRBs have invested in non permitted investment avenues such as housing financed companies, shares of companies including banking cos, MFs prohibited by RBI
Deficiencies observed (RRBs) (Out of 55 RRBs as of Half Year ended September 30, 2012) 7 RRBs had not undertaken the half-yearly review of investment Many RRBs did not have approved panel of brokers. 4 RRBs have kept their deposits with other RRBs No concurrent audit is in place in some RRBs as they reportedly do not have treasury transactions. 10 RRBs do not place the monthly concurrent audit report of treasury transactions before CEO and forward to ROs of RBI/NABARD Some RRBs are not submitting quarterly certificate indicating the investment held by the bank.
Deficiencies observed (SCBs&DCCBs) (Out of 23 SCBs & 233 DCCBs) ( as of Half Year ended March 31, 2012 ) 2 SCBs & 40 DCCBs had not undertaken half-yearly review of investment portfolio 35 DCCBs had not formulated investment policy. Policy of one SCB was in violation of RBI guidelines System of appointment of approved panel of brokers was not in vougue in many SCBs and DCCBs 16 DCCBs exceeded 5% discretionary investment ceiling under Non- SLR investment There was no system of concurrent audit in many SCBs/CCBs 4 SCBs and 32 CCBs had not submitted the quarterly certificate on Physical verification of investments held by them. Two CCBs have kept deposits in UCBs in violation of RBI instructions.
Deficiencies observed (SCBs&DCCBs) ( Out of 19 SCBs & 216 DCCBs ) ( as of Half Year ended September 30, 2012 ) 3 SCBs & 30 DCCBs had not undertaken half-yearly review of investment portfolio 30 DCCBs had not formulated investment policy. System of appointment of approved panel of brokers was not in vougue in many SCBs and DCCBs 1 SCB and 23 DCCBs exceeded 5% discretionary investment ceiling under Non-SLR investment 14 CCBs have kept their depsits with PSUs/Companies/Corporations There was no system of concurrent audit in many SCBs/CCBs 17 CCBs had not submitted the quarterly certificate on Physical verification of investments held by them. Two CCBs have kept deposits in UCBs in violation of RBI instructions.
Bakshi Committee Report on ST CCS Regulatory Issue CCBs deposited ` 53,414 crore with StCBs as CRR/SLR deposits, while the StCBs had loans outstanding of ` 73,978 crore to the same CCBs. The CRR/SLR deposits are kept with StCB for 'safety' associated with such statutory deposits and lending a large portion of it back to the CCBs seems to go against the very spirit of CRR/SLR deposits. As such, the CRR/SLR deposits of CCBs kept with the StCBs would seem to be used for lending to other cooperatives and individuals for non-agricultural purposes which are even more riskier if their data on NPAs on such loans are taken into account. It may therefore become necessary to prescribe safe investments for the statutory deposits of CCBs kept with StCBs. The Committee recommends that StCBs (and CCBs) may be given a higher share in the food consortium credit as one possible measure.