106
BANK OF BARODA
guidelines became effective April 1, 2003. The Bank adopted these guidelines on April 1, 2003. The principal features of
these guidelines are:
Banks are required to prepare consolidated financial statements intended for public disclosure.
Banks are required to submit to the RBI, consolidated prudential returns reporting their compliance with various
prudential norms on a consolidated basis, excluding insurance subsidiaries. Compliance
on a consolidated basis is
required in respect of the following main prudential norms:
Single borrower exposure limit of 15.0% of capital funds (20.0% of capital funds provided the additional exposure
of up to 5.0% is for the purpose of financing infrastructure projects);
Borrower group exposure limit of 40.0% of capital funds (50.0% of capital funds provided the additional exposure
of up to 10.0% is for the purpose of financing infrastructure projects);
Deduction from Tier I capital of the bank, of any shortfall in capital adequacy of a subsidiary for which capital
adequacy norms are specified; and
Consolidated capital market exposure limit of 2.0% of total on-balance sheet assets (excluding
intangible assets
and accumulated assets). Within the total limit, investment in shares, convertible bonds and debentures and units of
equity-oriented mutual funds should not exceed 10.0% of the Bank’s consolidated net worth.
Banks’ Investment Classification and Valuation Norms
The salient features of the RBI’s guidelines on investment classification and valuation are given below:
The entire investment portfolio is required to be classified under three categories: (a) held to maturity; (b)
held for
trading; and (c) available for sale. Banks should decide the category of investment at the time of acquisition.
Held to maturity investments compulsorily include (a) recapitalisation bonds, (b) investments in subsidiaries and
joint ventures and (c) investments in debentures deemed as advance. Held to maturity investments also include any
other investment identified for inclusion in this category subject to the condition that such investments cannot
exceed 25.0% of the total investment excluding recapitalisation bonds and debentures.
Profit on sale of investments in this category should be first taken to the profit and loss account and thereafter be
appropriated to the capital reserve account. Loss on sale will be recognised in the profit and loss account.
Investments under the Held for Trading category should be sold within 90 days; in the event
of inability to sell due
to adverse factors including tight liquidity, extreme volatility or a unidirectional movement in the market, the unsold
securities should be shifted to the Available for Sale category.
Profit or loss on the sale of investments in both the Held for Trading and Available for Sale categories is taken in
the profit and loss account.
Shifting of investments from or to held to maturity may be done with the approval of the board of directors once a
year, normally at the beginning
of the accounting year; shifting of investments from Available for Sale to Held for
Trading may be done with the approval of the board of directors, the asset liability management committee or the
investment committee; shifting from Held for Trading to Available for Sale is generally not permitted.
In September 2004, the Reserve Bank of India announced that it would set up an internal group to review the investment
classification guidelines to align them with international practices and the current state of
risk management practices in
India, taking into account the unique requirement applicable to banks in India of maintenance of a statutory liquidity ratio
equal to 25.0% of their demand and time liabilities. In the meanwhile, the Reserve Bank of India has permitted banks to
exceed the limit of 25.0% of investments for the held to maturity category provided the excess comprises only statutory
liquidity ratio investments and the aggregate of such investments in the held to maturity category do not exceed 25.0%
of the demand and time liabilities. The Reserve Bank of India has permitted banks to transfer additional securities to the
held to maturity category as a one time measure during fiscal 2005, in addition to the transfer
permitted under the earlier
guidelines. The transfer would be done at the lower of acquisition cost, book value or market value on the date of
transfer.
Held to Maturity securities are not marked to market and are carried at acquisition cost or at an amortized cost if acquired
at a premium over the face value.
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Securities classified as Available for Sale or Held for Trading are valued at market or fair value as at the balance sheet
date. Depreciation or appreciation for each basket within the Available for Sale and Held for Trading categories is
aggregated. Net
appreciation in each basket, if any, that is not realised is ignored, while net depreciation is provided for.
Investments in security receipts or pass through certificates issued by asset reconstruction companies or trusts set up by
asset reconstruction companies should be valued at the lower of the redemption value of the security receipts / pass-
through certificates, and the net book value of the financial asset.
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