FVTPL Account: Banks may get a new investment category

What is the News?

The Reserve Bank of India proposed a new investment category for banks—fair value through profit and loss(FVTPL) account. This is a part of its initiatives to align lenders investment portfolio regulations with the global accounting standards.

What is the Investment Portfolio of Banks currently?

Currently, the Investment Portfolios of Banks at present are classified under three categories: held to maturity(HTM), held for trading(HFT) and available for sale(AFS).

What are the changes proposed by RBI in these three categories?

New Category (FVTPL Account)

RBI has proposed a new investment category for banks—fair value through profit and loss (FVTPL) account. The existing held-for-trading (HFT) category will now come under the FVTPL category.

Note: HFT category was for debt securities purchased by banks with the intent of selling them within a short period of time. 

FVTPL will be the residual category where all investments that do not qualify for inclusion in HTM or AFS shall be categorized. This category can have investments such as securitisation receipts (SRs), mutual funds, alternate investment funds, equity shares, derivatives (including those undertaken for hedging), among others.

Definition of Held to maturity(HTM)

RBI said debt instruments with fixed or determinable payments and fixed maturity, with the intent of holding till maturity, shall now be classified as HTM. Corporate bonds have also been allowed to be held under HTM, which was not the case earlier.

Definition of AFS

Debt instruments held by a bank till maturity or sold before maturity would be eligible for AFS. Equity instruments will also be classified under AFS.

Other points mentioned in the Article
Indian Accounting Standards(Ind AS) 

RBI had asked banks to adopt the Indian Accounting Standards(Ind AS) from 1 April 2018. But the RBI had deferred its implementation several times as the banks were not prepared to make the transition.

Ind AS is on a par with the International Financial Reporting Standard (IFRS) under which banks are required to undertake early recognition of provisions for loss on loans and off-balance sheet exposures based on an expected credit loss (ECL) model. 

Currently, Indian banks follow the Generally Accepted Accounting Principles (GAAP), which requires banks to recognize mark-to-market losses.

Source:  This post is based on the article Banks may get a new investment categorypublished in Livemint on 15th January 2022.

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