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ACA-TM-37 (v2.2-20-Nov-10 ) Investment Policy – RRBs/SCBs/CCBs Satyajit Dwivedi Member of Faculty CAB, Pune.

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Presentation on theme: "ACA-TM-37 (v2.2-20-Nov-10 ) Investment Policy – RRBs/SCBs/CCBs Satyajit Dwivedi Member of Faculty CAB, Pune."— Presentation transcript:

1 ACA-TM-37 (v2.2-20-Nov-10 ) Investment Policy – RRBs/SCBs/CCBs Satyajit Dwivedi Member of Faculty CAB, Pune

2 ACA-TM-37 (v2.2-20-Nov-10 ) Front Office Deals in securities (Buy, Sale, & Repo Deals) Putting the bids in the auctions of T- bills and other securities Maintenance of deal records including the tapping of telephonic conversation

3 ACA-TM-37 (v2.2-20-Nov-10 ) Mid Office Risk Monitoring Risk Measurement Risk Management Management Information System Formulation and review of investment policy and guidelines for transactions in securities Submission of reports to the top executives & Board Maintenance of data base and updating front office with relevant information

4 ACA-TM-37 (v2.2-20-Nov-10 ) Back Office Inter Bank settlements of funds borrowed or lent Settlement of Call/ Notice/ Term/ CD/ CP/ REPO/ T- Bills/ NCD Physical verification of securities Monitoring brokers’ turn-over Reconciliation of RBI current A/c and constituents, own SGL investment portfolio Interest collection on NCDs / Bonds Dividend collection on shares or units Follow-up on concurrent, statutory and RBI inspection reports

5 ACA-TM-37 (v2.2-20-Nov-10 ) Investment Policy - Introduction Recaptalisation of RRBs/Cooperatives & Turn around strategy Allowed to invest their surplus in Money Market and Capital Market instruments Major shift in the approach of the banks Liquidity angle to Earnings angle Change in the composition of investment portfolio Securities scam and collapse of banks Quality of Investment portfolio - direct bearing on the health of the bank

6 ACA-TM-37 (v2.2-20-Nov-10 ) Need for Investment Policy Banks undertake transactions in securities on their own investment account or on behalf of their clients Irregularities were noticed – Harshad Mehta Scam A committee under the chairmanship of Shri Janakiraman was appointed (RBI guidelines (RPCD.RF. BC. 17/A4-92/ 93 dated 04.09.1992) to all banks for framing Investment policy. Banks to frame policy and constitute Investment Committee.)

7 ACA-TM-37 (v2.2-20-Nov-10 ) Broad Contents of the Policy Broad investment objectives Delegation of powers for investments Guidelines for portfolio composition Authority to put through the deals Procedure for obtaining sanction Procedure for investment Various prudential exposure limits Internal Control System Accounting Standards Audit Review and Reporting System

8 ACA-TM-37 (v2.2-20-Nov-10 ) Objectives Complying with Regulatory Requirements Maximising the Yield Optimising mix of current and permanent securities Optimising maturity profile and maintaining adequate liquidity Optimising composition and minimising credit risks Minimising Tax Liabilities Profit Planning

9 ACA-TM-37 (v2.2-20-Nov-10 ) Delegation of Powers BoD to delineate the powers of various authorities Aim is to facilitate smooth and quick investment decisions Key Factor – Time Available for taking decision Should constitute an Investment Committee to take investment decisions Bank to have a reporting system to report to the top management on weekly basis, the details of transactions in securities/ other investment transactions.

10 ACA-TM-37 (v2.2-20-Nov-10 ) Valuation of Securities & Provisioins Follow the accounting procedure, valuation of investments etc., as per RBI norms (RPCD.BC. 154/07.02.08/ 94-95 dated 23 May 1995) & make provisions for depreciation/ loss Amortisation of Premium paid on permanent investment over the remaining period of maturity of security Half yearly review of investment portfolio (as of 30 September and 31 March) - place before Board within one month - forward approved report to RBI/ NABARD by 15 November and 15 May.

11 ACA-TM-37 (v2.2-20-Nov-10 ) Valuation of Securities & Provisioins Profit made on sale of Investments transfer to Investment Fluctuation Reserve & loss to P & L A/c preparing funds flow statement to arrive at the surplus funds available for investment on a daily basis. classified investments into NPAs in accordance with RBI instructions and provision, made or not made. The limit for sanction of advances against share and debentures to individuals should not exceed Rs.10 lakh

12 ACA-TM-37 (v2.2-20-Nov-10 ) Delegation of Powers Investment in call money market - delegated to dealers - instant decision Inter Bank Deposits - GM / CEO Other Investment Decisions - Investment Committee Power to be specific, clear and unambiguous Different limits for different authorities and different instruments

13 ACA-TM-37 (v2.2-20-Nov-10 ) Delegation Principles Higher the amount higher the level More the time higher the level Online deals at lower levels (call) Negotiated Market at higher levels Spot market lower levels T + market at higher levels

14 ACA-TM-37 (v2.2-20-Nov-10 ) Portfolio Composition SLR & Non-SLR Investments SLR Investments –GOI Securities –Treasury bills –State Govt. Securities –Central Govt. guaranteed bonds –State Govt. guaranteed bonds –Other approved securities

15 ACA-TM-37 (v2.2-20-Nov-10 ) Non- SLR Investments Bonds issued by PSUs, FIs, Banks Equity shares and Debentures Certificate of Deposits (CDs),Commercial Papers (CPs) etc. Units of UTI

16 ACA-TM-37 (v2.2-20-Nov-10 ) Diversification Maturity-wise investment requirement to be mentioned Short term : less than 5 years Medium Term : 5 - 10 years Long Term : more than 10 years Maturity pattern of investments to match with maturity pattern of surplus cash

17 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. Security-wise policy Security-wise policy How much to be invested in which type of securities Industry-wise composition relates to investments in corporate debentures and shares Overall portfolio to be governed by RBI / NABARD Guidelines / bye-laws

18 ACA-TM-37 (v2.2-20-Nov-10 ) Exposure Norms – Coops. Investments in PSU bonds to have RBI's permission and not to exceed 10% of the bank's deposits at the end of previous year Coops. not to invest in shares of other cooperative institutions Discretioiary invstments by Coops. not to exceed 5% of non-SLR surplus funds. (Monthly average WFs of previous year MINUS monthly average loans MINUS 35% of DTL)

19 ACA-TM-37 (v2.2-20-Nov-10 ) Exposure Norms - RRBs Investments of non-SLR not to exceed 50% of refinance, or 25% of the aggregate deposits at the end of the preceding year, whichever is higher Deployment of surplus non-SLR funds in the credit portfolio of sponsor banks not exceed 15% of fresh lendings during the year. Loans granted to a company together with investments made in its shares should not exceed 15% of capital funds. Investment of surplus non-SLR funds in shares and debentures of corporate companies and units of MFs not to exceed 5% of the incremental deposits

20 ACA-TM-37 (v2.2-20-Nov-10 ) Procedure for obtaining approval Note to contain Surplus funds, period for which available Existing position of SLR investment vis-a-vis statutory requirement Non-SLR investment vis-a-vis exposure norms stipulated Availability of investments in the market Various risks involved Yielding pattern of different types of securities

21 ACA-TM-37 (v2.2-20-Nov-10 ) Procedure for Investment Investment in G-Secs If SGL Facility available, the transactions in G-Secs should be put through SGL A/c only Ensure that sufficient balance is available in the a/c before issue of SGL Transfer form Purchasing bank to issue cheques only after receipt of SGL Transfer form The form should be signed by two authorised officials

22 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. Should be in the standard format prescribed by RBI and serially numbered Penal action in case the SGL form bounces back Amount of SGL form will be debited to the current account of the selling bank In the event of overdraft, penal interest will be charged - 3% over above DFHI’s call rate

23 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. In case of bouncing on 3 occasions, the bank will be debarred from trading with the use of SGL facility for 6 months If after restoration of the facility, any SGL form bounces again, the bank will be permanently debarred from the use of SGL facility

24 ACA-TM-37 (v2.2-20-Nov-10 ) Dealings through brokers Role of broker - restricted to that of bringing the two parties to the deal together Banks should not undertake any purchase or sale transactions with broking firms on principal to principal basis While negotiating the deal, the broker is not obliged to disclose the identity of the counter party of the deal On conclusion he should disclose the counter party

25 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. The contract note to contain the name of the counter party Settlement of deals - funds & securities settlement between the banks Broker should have no role to play Banks not to give power of attorney to brokers to act on their behalf With the approval of top management, the bank to prepare a list of approved brokers

26 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. List to be reviewed annually or more often if warranted Clear cut criteria to be laid down for empanelment Only brokers registered with NSE or BSE or OTCEI should be utilised for acting as intermediary Verification of creditworthiness, market reputation, etc.

27 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. A record of broker-wise deals and the brokerage paid to be maintained Disproportionate part of the business should not be transacted with one or two brokers Limit of 5% of the total transactions (both purchases and sales) entered into by a bank during a year should be treated as the upper contract limit for each approved broker Banks to fix aggregate contract limit for each of the approved brokers

28 ACA-TM-37 (v2.2-20-Nov-10 ) Prudential Exposure Norms Specify single investment exposure norms Composition of investment under different categories of investment Types of SLR and Non-SLR investments and their limit Non-SLR investments – Shares, Debentures, PSU Bonds, MF Units, CPs & CDs Stop Loss Limit

29 ACA-TM-37 (v2.2-20-Nov-10 ) Internal Control System Clear functional separation of (a) trading (b) settlement, monitoring and control and (c) accounting Trading desk to prepare a Deal Slip for every transaction Contain the nature of the deal, name of the counter party, direct deal or through a broker, name of the broker, details of security, price, contract date and time

30 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. Deals slips to be serially numbered and accounted properly No substitution of the counterparty once the deal is concluded The security sold / purchased cannot be substituted The Accounts Section to write their books independently based on the vouchers passed by the back office

31 ACA-TM-37 (v2.2-20-Nov-10 ) Contd.. Maintain records of SGL transfer forms issued, received and whether balances as per bank's books reconciled at quarterly intervals with balances in the books of PDO of RBI The reconciliation to be checked by internal audit/ Inspection Department of the bank. Reporting system to report the details of transactions in securities, bouncing of SGL forms, etc, on a weekly basis

32 ACA-TM-37 (v2.2-20-Nov-10 ) Reports to be generated

33 ACA-TM-37 (v2.2-20-Nov-10 ) Audit Review & Reporting Banks to undertake a half-yearly review of their investment portfolio Put up the review note to the Board within one month Report to indicate adherence to the laid down policy, procedures and RBI guidelines A copy of the review note to be sent to RBI / NABARD by 15 November / 15 May

34 ACA-TM-37 (v2.2-20-Nov-10 ) Audit Review & Reporting Concurrent Audit to be conducted on treasury transactions Audit report to be placed before Chairman & M D every month Concurrent Audit Reports to be sent to NABARD, DoS, Head Office Investment Policy to be placed before the Board for approval

35 ACA-TM-37 (v2.2-20-Nov-10 ) Thank You


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