State-owned banks’ share in the ‘fair value through profit and loss investment portfolio’ (FVPTL), the newly-introduced investment category, has gone down to 37.2% from around 45%. Meanwhile, the share of private banks has risen to nearly one-third, according to the Reserve Bank of India’s (RBI) latest Financial Stability Report.
The RBI introduced the new investment category, FVTPL, in April 2024. As per the revised norms, banks are required to classify their entire investment portfolio into three categories — held to maturity (HTM), available for sale (AFS), and FVTPL. The old category, held for trading, has now become a sub-category of FVTPL.
According to RBI guidelines, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The introduction of this investment option aims to ensure that banks implement robust risk management and control processes.
The norms mandate that securities classified under the HFT sub-category within FVTPL must be fair valued on a daily basis, while other securities in FVTPL should be fair valued at least quarterly, if not more frequently. Under the new category, any change in fair value is recorded directly in the income statement.
A change in the investment norms and slower growth of the on-balance sheet liquidity held in the investment books, led to a decline in the state-owned banks’ share in the said category, said banking analysts. However, in absolute terms, the state-owned banks still hold the largest share in the aforesaid category owing to large accounting books, said bankers.
Bankers said that the strategy was to spread risks evenly across the investment portfolios as any change in the trajectory of the domestic rate cut cycle would impact the movement in yields, thereby impacting banks’ treasury income.
Earlier, banks were allowed a one-time shift of securities between the held to maturity (HTM) and available for sale (AFS) categories at the beginning of the financial year. This provided banks an opportunity to monetise gains by selling the securities in the market after shifting them from HTM.
Post the implementation of new guidelines, banks are not allowed annual shifting of securities thereby limiting the exponential profits. Owing to active participation in the interest rate derivative markets, foreign banks and private banks were able to gain more by keeping their investments in foreign value through profit and loss, said banking officials.