Source: The post is based on the article “Banking investments – New norms will impart stability” published in Business Standard on 14th September 2023.
Syllabus: GS 3 – Indian Economy – Banking Sector
Relevance: RBI’s new guidelines for investment in the banking sector.
News: The Reserve Bank of India (RBI) has recently released updated investment norms for the banking sector, aiming to enhance regulatory oversight.
The new framework aligns with global standards and best practices, aiming for a balanced approach to recognizing gains and losses in fair value.
About the New Guidelines
The new guidelines require banks to categorize their entire investment portfolio into three categories: Held-to-Maturity (HTM), Available for Sale, and Fair Value through Profit and Loss (FVTPL).
This will exclude investments in joint ventures and subsidiaries while securities held for trading will fall under the FVTPL subcategory.
The new framework introduces a dedicated trading book for banks and eliminates the previous limit on the held-to-maturity (HTM) portion of the investment portfolio.
This change will give banks more flexibility in managing their investments, boosts demand for corporate bonds, and improve earnings stability.
However, banks must be cautious with their investment portfolios under the new rules, as freely moving securities in and out of the Held-to-Maturity (HTM) category won’t be allowed.
Reclassification will be strict, needing approvals from the bank’s board and the RBI, which will be seldom granted.
Additionally, in any fiscal year, the sale of HTM securities cannot exceed 5% of the portfolio’s opening value without RBI approval.
The new framework also includes detailed rules for securities transfers between categories and clear guidelines for categorizing and valuing securities.
Banks must establish an investment fluctuation reserve, which can be included in Tier-II capital and enhances the banking system’s capacity to absorb losses.
Overall, this framework is expected to enhance disclosure, contributing to greater stability in the banking system.
Why were the new guidelines needed?
The current regulations for valuing investments in banks have been old and in place since 2000.
Further, RBI’s decision to come up with new guidelines has been due to the lessons learnt from the US, where inadequate investment regulation contributed to bank crises.
Although Indian banks aren’t facing the same risks, revising the regulatory framework based on experience will improve the Indian banking regulatory structure.
Discover more from Free UPSC IAS Preparation Syllabus and Materials For Aspirants
Subscribe to get the latest posts sent to your email.
