In a circular to all commercial banks, the central bank said any appreciation in the value of securities on account of the method of valuation indicated by it cannot be booked as income. This means that banks cannot write back depreciation due to increase in the value of securities. The banks will have to book the write-back of excess depreciation to their reserves, without propping up their profits.

Any gain on sale of securities in the "permanent" category will be taken to the profit and loss account and thereafter appropriated to the "capital reserves".

The indicative 10-year YTM for 1999-2000 is 120 basis points lower than the 12.05 per cent suggested by the RBI for 1998-99. By end-March 2000, secondary market YTM at the short end had come down by around 110 bps, in the medium-term by 120 bps and at the long end by 135 basis points.

Banks will have to value permanent investments at cost. In case the cost price is higher than the face value of securities, the premium should be amortised over the remaining maturity of the security. However, where the cost price is less than the face value, the difference should be ignored and not amortised or taken to income account since the amount indicates unrealised gain.

For current investments, the RBI has told banks to rely on market quotations as on March 31, 2000.

Where market quotations are not available, valuation the RBI indicated YTM list will be referred by the banks.

Banks are required to classify a minimum of 75 per cent of their holdings in government and other approved securities as "current" investments.

State government and government guaranteed securities will be valued at 25 basis points (bps) above the YTM indicated by the central bank.

As regards the valuation of unquoted securities including PSU bonds, the RBI has asked banks to uniformly follow the YTM method.

Recapitalisation bonds will not form part of `permanent' or `current' investments. It will not be necessary to provide for depreciation on the recap bonds received by the state-run banks from the government. For banks acquiring recap bonds of other banks for investment purposes, the depreciation will have to be provided for by banks.