Audit of treasury

Investments PortfolioInvestments Portfolio

By:- CA Abhinav JainBy:- CA Abhinav Jain

Audit OF Bank Treasury

Investments PortfolioInvestments Portfolio

1.1. There must be internal investment There must be internal investment policy of an bankpolicy of an bank

2.2. It must be in accordance with It must be in accordance with statutory Rules and regulations statutory Rules and regulations and sound business practice.and sound business practice.

3.3. It must be reviewed time to time.It must be reviewed time to time.

Classification of investmentsClassification of investments

1.1. Held to Maturity (HTM)Held to Maturity (HTM)

2.2. Held for Trading (HFT)Held for Trading (HFT)

3.3. Available for sale (AFS)Available for sale (AFS)

There are 3 classification of investmentsThere are 3 classification of investments

1. Held To Maturity1. Held To Maturity

intention to hold them up to maturity should not exceed 25 per cent of the bank’s total

investments.* limit can be exceed if investments are in SLR

securities But the total investments in SLR securities should

not be more than 25 percent of its DTL liabilities as on last Friday of the second last fortnight.


* Following investments will not be included * Following investments will not be included in calculation of limit of HTMin calculation of limit of HTM

Re-capitalization bonds received from the Government of India.

Investment in subsidiaries and joint ventures. [A joint venture would be one in which the bank, along with its subsidiaries, holds more than 25% of the equity.]

The investments in debentures/ bonds, which are deemed to be in the nature of an advance.


Sale of investments:-Sale of investments:- Profit on sale of investments in this

category should be first taken to the Profit & Loss Account and thereafter be appropriated to the ‘Capital Reserve Account’.

Loss on sale will be recognized in the Profit & Loss Account.

2. Held For Trading (HFT) 2. Held For Trading (HFT)

Intention to take short term advantage Intention to take short term advantage with regard to interest/price movements.with regard to interest/price movements.

Normally sold within 90 daysNormally sold within 90 days No restriction of HoldingsNo restriction of Holdings Profit or Loss on sale taken to the Profit or Loss on sale taken to the Profit &

Loss Account.

3. Available for sale (AFS)3. Available for sale (AFS)

Rest of all investmentsRest of all investments No restriction of HoldingsNo restriction of Holdings Profit or Loss on sale taken to the Profit or Loss on sale taken to the

Profit & Loss Account

Valuation Part of investments is discussed later.

Shifting Among CategoriesShifting Among Categories

1.1. Shifting From/to HTMShifting From/to HTM

2.2. Shifting from AFS to HFTShifting from AFS to HFT

3.3. Shifting from HFT to AFSShifting from HFT to AFS

There can be 3 type of shifting.

Shifting Among CategoriesShifting Among Categories

Transfer in all cases should be at the Least of following:-

1. Acquisition Cost 2. Book Value 3. Market ValueAnd provide depreciation if any.

1. Shifting From/to HTM1. Shifting From/to HTM

Allowed only at the beginning of year.Allowed only at the beginning of year. No shifting is allowed during the year.No shifting is allowed during the year. Approval of BOD is required.Approval of BOD is required.

2. Shifting from AFS to HFT2. Shifting from AFS to HFT

Approval of BOD/ALCO/Investment Committee.

In case of exigencies, shifting may be done with the approval of the Chief Executive of the bank/ Head of the ALCO.

But it should be ratified by the Board of Directors/ ALCO

3. Shifting from HFT to AFS3. Shifting from HFT to AFS

Generally it is not allowed, permitted only under exceptional circumstances

approval of the Board of Directors/ ALCO/ Investment Committee

Income RecognitionIncome Recognition

1.1. Accrual BasisAccrual Basis

2.2. Cash basisCash basis

1. Accrual Basis1. Accrual Basis

Income from Govt. securities & bonds Income from Govt. securities & bonds and debenture of Corporate bodies if and debenture of Corporate bodies if Interest rate is Pre-determined and It is Interest rate is Pre-determined and It is not in Arrears.not in Arrears.

Return Return (interest and principal both)(interest and principal both) on investment is on investment is guaranteed by CG/SG and it is serviced guaranteed by CG/SG and it is serviced regularly.regularly.

income from dividend if right to receive if right to receive dividend is established.dividend is established.

2. Cash basis2. Cash basis

Income from Mutual Fund.Income from Mutual Fund. All other income.All other income.

Broken Period Interest (Paid to Seller)

It should not be capitalized, treat it It should not be capitalized, treat it as expenses.as expenses.

Bank should comply income tax Bank should comply income tax requirements. requirements.

Non-performing Investments (NPI)

NPI (Similar to NPA) is where:-NPI (Similar to NPA) is where:- Interest remains unpaid more than 90 days.Interest remains unpaid more than 90 days. mutatis-mutandis to preference shares where dividend is

not paid. In the case of equity shares, in the event the investment in

the shares of any company is valued at Re.1 per company on account of the non availability of the latest balance sheet, those equity shares would also be reckoned as NPI.

Any Credit facility availed by the issuer is NPA in the books of bank then investment in any of security issued by the same issuer is NPI and vice versa.

Valuation of Investments

1. Held to Maturity2. Available For Sale3. Held For Trading

1. Held to Maturity

At Least ofAt Least of Acquisition Cost (AC)Acquisition Cost (AC) Face Value (FV)Face Value (FV)

If AC > FV then amortized the premium If AC > FV then amortized the premium amount over the period of holding. amount over the period of holding.

MTM is not allowed.MTM is not allowed. Recognize depreciation if it is permanent Recognize depreciation if it is permanent

diminution in value.diminution in value. Such depreciation should be determined Such depreciation should be determined

and provided each investment Individually. and provided each investment Individually.

2. Available For Sale

MTM at quarterly or more frequent intervals. MTM at quarterly or more frequent intervals. (Individually)(Individually) Depreciation - provide provisionDepreciation - provide provision Appreciation – ignore it. (i.e. BV will not change)Appreciation – ignore it. (i.e. BV will not change)

Provision will be debited to the P/L And the least of Provision will be debited to the P/L And the least of following is to be transferred from the Investment following is to be transferred from the Investment fluctuation Reserve (IFR) to P/L fluctuation Reserve (IFR) to P/L Balance available in IFRBalance available in IFR Equivalent amount of provision (Net of tax Equivalent amount of provision (Net of tax

benefit & benefit & consequent reduction in statutory reduction in statutory reserve)reserve)

2. Available For Sale

If provision is in excessIf provision is in excess Transfer such amount to P/LTransfer such amount to P/L An equivalent amount (Net of taxes and net of An equivalent amount (Net of taxes and net of

transfer to statutory reserve) should be transfer to statutory reserve) should be appropriated to the IFRappropriated to the IFR

Amount Debited or Credited to P/L due to provision is to be shown under the head “Expenditure – Provisions & Contingencies”

And the amount appropriated and transferred to P/L due to IFR is to be shown as ‘below the line’ items.

3.Held For Trading

It should be MTM at monthly or more It should be MTM at monthly or more frequent intervals.frequent intervals.

The book value of the investment is to be change with the revaluation.

All other same as HFT.All other same as HFT.

Valuation of Investments

• Each investment in each category should be valued individually.

If interest/ principal is in arrears, the banks should not reckon income and make provision for the depreciation in the value of the investment.

Such depreciation should not be set off with appreciation of other security.

Investment Fluctuation Reserve

It is prudent to transfer gain realized It is prudent to transfer gain realized on the sale of securities.on the sale of securities.

Created to guard possible reversal of Created to guard possible reversal of unexpected developments.unexpected developments.

Allowed to build up to 10% of the Allowed to build up to 10% of the investments under HFT & AFS investments under HFT & AFS category.category.

This amount will be reckoned for the This amount will be reckoned for the TIER-II capitalTIER-II capital

Market value (For the investments in AFS & HFT categories)

Quoted securities:- valued at quotes Quoted securities:- valued at quotes at stock exchange, SGL a/c at stock exchange, SGL a/c transaction, price list of transaction, price list of RBI,PDAI,FIMMDARBI,PDAI,FIMMDA

Unquoted Securities:- valued at on valued at on YTM basisYTM basis

Subsidiary Ledger A/CSubsidiary Ledger A/C(SGL)(SGL)

It is a Demat form of holding It is a Demat form of holding securitied with RBI.securitied with RBI.

If any Bank/FI holds this a/c on the If any Bank/FI holds this a/c on the behalf of his customer the it is to be behalf of his customer the it is to be said as CSGL (Constituent Subsidiary said as CSGL (Constituent Subsidiary Ledger A/C)Ledger A/C)


All securities for which SGL facility is All securities for which SGL facility is available should be traded through available should be traded through SGL only.SGL only.

If sufficient balance for securities is If sufficient balance for securities is not available for seller bank and not available for seller bank and balance of funds for purchasing bank balance of funds for purchasing bank then SGL form will bounce.then SGL form will bounce.

If bouncing occurs more than thrice If bouncing occurs more than thrice then the bank will debarred for 6 then the bank will debarred for 6 months. months.


SGL transfer form received by SGL transfer form received by purchasing bank should be lodged to purchasing bank should be lodged to RBI within 1 working days.RBI within 1 working days.

No sale will be by transfer of SGL No sale will be by transfer of SGL FormForm

SGL form must be signed by 2 SGL form must be signed by 2 officials and must indicate trade/deal officials and must indicate trade/deal date and Part C of the SGL form date and Part C of the SGL form under sale date.under sale date.

Question on Investment limit in Question on Investment limit in HTMHTM

Particulars (Rs. In Crore)

Total Demand and Time Liabilities 25000

Total Investment 15000

HTM 9000

HFT 2000

AFS 4000

The investment held in HTM 50 Crore is recapitalization bond received from GOI, 5000 Crore in SLR securities.

AnswerAnswer

Particulars

Maximum Permissible investment

Actual Amount invested Remarks

Investment in HTM (Non SLR Securities) 3750 3950

Extra Investment of 200 crore

Investment in HTM (SLR Securities) 6250 5000 ok

Total investment can be invested in HTM 10000 9000 Ok

Note:- Amount invested in recapitalization bond or in joint venture or in bonds or debenture (assumed be in advance) is not to be included in calculation of actual amount invested because this investment is allowed

Thank YouThank You

THE ENDTHE END

Audit of treasury

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