ACA-TM-37 (v2.2-20-Nov-10)

Investment Policy – RRBs/SCBs/CCBs

Satyajit DwivediMember of Faculty

CAB, Pune

ACA-TM-37 (v2.2-20-Nov-10)

Front Office

• Deals in securities (Buy, Sale, & Repo Deals)

• Putting the bids in the auctions of T- bills and other securities

• Maintenance of deal records including the tapping of telephonic conversation

ACA-TM-37 (v2.2-20-Nov-10)

Mid Office

• Risk Monitoring

• Risk Measurement

• Risk Management

• Management Information System

• Formulation and review of investment policy andguidelines for transactions in securities

• Submission of reports to the top executives & Board

• Maintenance of data base and updating front office with relevant information

ACA-TM-37 (v2.2-20-Nov-10)

Back Office

• Inter Bank settlements of funds borrowed or lent

• Settlement of Call/ Notice/ Term/ CD/ CP/ REPO/ T-Bills/ NCD

• Physical verification of securities

• Monitoring brokers’ turn-over

• Reconciliation of RBI current A/c and constituents, own SGL investment portfolio

• Interest collection on NCDs / Bonds

• Dividend collection on shares or units

• Follow-up on concurrent, statutory and RBI inspection reports

ACA-TM-37 (v2.2-20-Nov-10)

Investment Policy - Introduction

• Recaptalisation of RRBs/Cooperatives & Turn around strategy• Allowed to invest their surplus in Money Market and Capital

Market instruments• Major shift in the approach of the banks• Liquidity angle to Earnings angle• Change in the composition of investment portfolio• Securities scam and collapse of banks• Quality of Investment portfolio - direct bearing on the health

of the bank

ACA-TM-37 (v2.2-20-Nov-10)

Need for Investment Policy• Banks undertake transactions in securities• on their own investment account or on behalf of

their clients• Irregularities were noticed – Harshad Mehta Scam• A committee under the chairmanship of Shri

Janakiraman was appointed (RBI guidelines (RPCD.RF. BC. 17/A4-92/ 93 dated

04.09.1992) to all banks for framing Investment policy. Banks to frame policy and constitute Investment Committee.)

ACA-TM-37 (v2.2-20-Nov-10)

Broad Contents of the Policy

• Broad investment objectives

• Delegation of powers for investments

• Guidelines for portfolio composition

• Authority to put through the deals

• Procedure for obtaining sanction

• Procedure for investment

• Various prudential exposure limits

• Internal Control System

• Accounting Standards

• Audit Review and Reporting System

ACA-TM-37 (v2.2-20-Nov-10)

Objectives

• Complying with Regulatory Requirements• Maximising the Yield• Optimising mix of current and permanent securities• Optimising maturity profile and maintaining

adequate liquidity• Optimising composition and minimising credit risks• Minimising Tax Liabilities• Profit Planning

ACA-TM-37 (v2.2-20-Nov-10)

Delegation of Powers• BoD to delineate the powers of various authorities• Aim is to facilitate smooth and quick investment decisions• Key Factor – Time Available for taking decision• Should constitute an Investment Committee to take

investment decisions• Bank to have a reporting system to report to the top

management on weekly basis, the details of transactions in securities/ other investment transactions.

ACA-TM-37 (v2.2-20-Nov-10)

Valuation of Securities & Provisioins

• Follow the accounting procedure, valuation of investments etc., as per RBI norms (RPCD.BC. 154/07.02.08/ 94-95 dated 23 May 1995) & make provisions for depreciation/ loss

• Amortisation of Premium paid on permanent investment over the remaining period of maturity of security

• Half yearly review of investment portfolio (as of 30 September and 31 March) - place before Board within one month - forward approved report to RBI/ NABARD by 15 November and 15 May.

ACA-TM-37 (v2.2-20-Nov-10)

Valuation of Securities & Provisioins

• Profit made on sale of Investments transfer to Investment Fluctuation Reserve & loss to P & L A/c

• preparing funds flow statement to arrive at the surplus funds available for investment on a daily basis.

• classified investments into NPAs in accordance with RBI instructions and provision, made or not made.

• The limit for sanction of advances against share and debentures to individuals should not exceed Rs.10 lakh

ACA-TM-37 (v2.2-20-Nov-10)

Delegation of Powers

• Investment in call money market - delegated to dealers - instant decision

• Inter Bank Deposits - GM / CEO• Other Investment Decisions - Investment

Committee• Power to be specific, clear and unambiguous• Different limits for different authorities and

different instruments

ACA-TM-37 (v2.2-20-Nov-10)

Delegation Principles

• Higher the amount higher the level

• More the time higher the level

• Online deals at lower levels (call)

• Negotiated Market at higher levels

• Spot market lower levels

• T + market at higher levels

ACA-TM-37 (v2.2-20-Nov-10)

Portfolio Composition

• SLR & Non-SLR Investments

SLR Investments– GOI Securities– Treasury bills– State Govt. Securities– Central Govt. guaranteed bonds– State Govt. guaranteed bonds– Other approved securities

ACA-TM-37 (v2.2-20-Nov-10)

Non- SLR Investments

• Bonds issued by PSUs, FIs, Banks

• Equity shares and Debentures

• Certificate of Deposits (CDs),Commercial Papers (CPs) etc.

• Units of UTI

ACA-TM-37 (v2.2-20-Nov-10)

Diversification

• Maturity-wise investment requirement to be mentioned

• Short term : less than 5 years• Medium Term : 5 - 10 years• Long Term : more than 10 years• Maturity pattern of investments to match with

maturity pattern of surplus cash

ACA-TM-37 (v2.2-20-Nov-10)

Contd..

• Security-wise policySecurity-wise policyHow much to be invested in which type of securities

• Industry-wise composition relates to investments in corporate debentures and shares

• Overall portfolio to be governed by RBI / NABARD Guidelines / bye-laws

ACA-TM-37 (v2.2-20-Nov-10)

Exposure Norms – Coops.• Investments in PSU bonds to have RBI's

permission and not to exceed 10% of the bank's deposits at the end of previous year

• Coops. not to invest in shares of other cooperative institutions

• Discretioiary invstments by Coops. not to exceed 5% of non-SLR surplus funds. (Monthly average WFs of previous year MINUS monthly average loans MINUS 35% of DTL)

ACA-TM-37 (v2.2-20-Nov-10)

Exposure Norms - RRBs• Investments of non-SLR not to exceed 50% of refinance, or

25% of the aggregate deposits at the end of the preceding year, whichever is higher

• Deployment of surplus non-SLR funds in the credit portfolio of sponsor banks not exceed 15% of fresh lendings during the year.

• Loans granted to a company together with investments made in its shares should not exceed 15% of capital funds.

• Investment of surplus non-SLR funds in shares and debentures of corporate companies and units of MFs not to exceed 5% of the incremental deposits

ACA-TM-37 (v2.2-20-Nov-10)

Procedure for obtaining approval

Note to contain• Surplus funds, period for which available• Existing position of SLR investment

vis-a-vis statutory requirement• Non-SLR investment vis-a-vis exposure norms

stipulated• Availability of investments in the market• Various risks involved• Yielding pattern of different types of securities

ACA-TM-37 (v2.2-20-Nov-10)

Procedure for Investment

Investment in G-Secs• If SGL Facility available, the transactions in G-Secs

should be put through SGL A/c only• Ensure that sufficient balance is available in the a/c

before issue of SGL Transfer form• Purchasing bank to issue cheques only after receipt

of SGL Transfer form• The form should be signed by two authorised officials

ACA-TM-37 (v2.2-20-Nov-10)

Contd..

• Should be in the standard format prescribed by RBI and serially numbered

• Penal action in case the SGL form bounces back• Amount of SGL form will be debited to the current

account of the selling bank• In the event of overdraft, penal interest will be

charged - 3% over above DFHI’s call rate

ACA-TM-37 (v2.2-20-Nov-10)

Contd..

• In case of bouncing on 3 occasions, the bank will be debarred from trading with the use of SGL facility for 6 months

• If after restoration of the facility, any SGL form bounces again, the bank will be permanently debarred from the use of SGL facility

ACA-TM-37 (v2.2-20-Nov-10)

Dealings through brokers

• Role of broker - restricted to that of bringing the two parties to the deal together

• Banks should not undertake any purchase or sale transactions with broking firms on principal to principal basis

• While negotiating the deal, the broker is not obliged to disclose the identity of the counter party of the deal

• On conclusion he should disclose the counter party

ACA-TM-37 (v2.2-20-Nov-10)

Contd..• The contract note to contain the name of the counter

party

• Settlement of deals - funds & securities settlement between the banks

• Broker should have no role to play

• Banks not to give power of attorney to brokers to act on their behalf

• With the approval of top management, the bank to prepare a list of approved brokers

ACA-TM-37 (v2.2-20-Nov-10)

Contd..• List to be reviewed annually or more often if warranted

• Clear cut criteria to be laid down for empanelment

• Only brokers registered with NSE or BSE or OTCEI should be utilised for acting as intermediary

• Verification of creditworthiness, market reputation, etc.

ACA-TM-37 (v2.2-20-Nov-10)

Contd..• A record of broker-wise deals and the brokerage paid to

be maintained• Disproportionate part of the business should not be

transacted with one or two brokers• Limit of 5% of the total transactions (both purchases and

sales) entered into by a bank during a year should be treated as the upper contract limit for each approved broker

• Banks to fix aggregate contract limit for each of the approved brokers

ACA-TM-37 (v2.2-20-Nov-10)

Prudential Exposure Norms

• Specify single investment exposure norms

• Composition of investment under different categories of investment

• Types of SLR and Non-SLR investments and their limit

• Non-SLR investments – Shares, Debentures, PSU Bonds, MF Units, CPs & CDs

• Stop Loss Limit

ACA-TM-37 (v2.2-20-Nov-10)

Internal Control System

• Clear functional separation of (a) trading (b) settlement, monitoring and control and (c) accounting

• Trading desk to prepare a Deal Slip for every transaction

• Contain the nature of the deal, name of the counter party, direct deal or through a broker, name of the broker, details of security, price, contract date and time

ACA-TM-37 (v2.2-20-Nov-10)

Contd..• Deals slips to be serially numbered and accounted

properly

• No substitution of the counterparty once the deal is concluded

• The security sold / purchased cannot be substituted

• The Accounts Section to write their books independently based on the vouchers passed by the back office

ACA-TM-37 (v2.2-20-Nov-10)

Contd..

• Maintain records of SGL transfer forms issued, received and whether balances as per bank's books reconciled at quarterly intervals with balances in the books of PDO of RBI

• The reconciliation to be checked by internal audit/ Inspection Department of the bank.

• Reporting system to report the details of transactions in securities, bouncing of SGL forms, etc, on a weekly basis

ACA-TM-37 (v2.2-20-Nov-10)

Reports to be generated

ACA-TM-37 (v2.2-20-Nov-10)

Audit Review & Reporting

• Banks to undertake a half-yearly review of their investment portfolio

• Put up the review note to the Board within one month

• Report to indicate adherence to the laid down policy, procedures and RBI guidelines

• A copy of the review note to be sent to RBI / NABARD by 15 November / 15 May

ACA-TM-37 (v2.2-20-Nov-10)

Audit Review & Reporting

• Concurrent Audit to be conducted on treasury transactions

• Audit report to be placed before Chairman & M D every month

• Concurrent Audit Reports to be sent to NABARD, DoS, Head Office

• Investment Policy to be placed before the Board for approval

ACA-TM-37 (v2.2-20-Nov-10)

Thank You