RBI Investment Directions: The New Playbook for Treasury and Audit

From Caps to Intent Based Governance

The earlier regime had a 25% HTM (Held to Maturity) cap with asymmetric accounting where mark-to-market losses hit P&L (profit and loss) immediately while gains were constrained. The 2023 revamp removed the HTM cap, introduced the SPPI (Solely Payments of Principal and Interest) test, and made fair value changes symmetric across AFS (Available for Sale) and FVTPL (Fair Value Through P&L). Also, the holding period norm for HFT instruments is eased. The new directives hard code governance through a standalone Board chapter and embedded FAQs clarifying LCR (Liquidity Coverage Ratio) monetisation, NPI (Non-Performing Investments) segregation, and non-SLR controls. Audit focus correspondingly shifts from mere numerical threshold/defeasance checks to documented acquisition intent, behavioural consistency, accounting, reporting and governance evidence. (Chapter II Para 6–14; Chapter IV Para 33–41).

Board Oversight: Non-Delegable Core Chapter II Para 6–14

There must be a Board approved detailed Investment Policy covering objectives for own and client/constituent books, eligible instruments and derivatives, sanction authorities, exposure ceilings (issuer, PSU/corporate, private placement), valuation frameworks, broker policies, limit and risk systems (Para 16-17). An Investment Committee is mandatory for equity, preference, convertibles, and equity-like exposures (Para 7 and 22). Boards must define impairment thresholds for subsidiaries, associates, and JVs (joint ventures), which sit outside HTM/AFS/FVTPL buckets (Para 8; Para 64(5)). Bank shall not reclassify investments between categories. Any portfolio reclassification requires Board and RBI's pre-approval, creating a control gate/hard bar against switching (Para 9; Para 66). A Board-approved HTM sale policy must specify permitted exits such as credit deterioration, buybacks, or OMO (open market operations) participation without invalidating HTM intent (Para 10; Para 69).

Non-SLR investments require Board ensured risk systems and quarterly reviews of credit quality, valuation, and compliance with the 10% unlisted cap (Para 11–12; Para 90(12)). Broker concentration breaches must be reported post-facto to the Board (Para 13; Para 92(8)). A half-yearly portfolio review as of March 31 and September 30 must reach the Board by end-May and end-November, covering performance, prudential limits, SPPI consistency, and Level 3 valuation exposures (Para 14; Para 93). Audit work must inspect Board and Committee minutes, policy, and evidence of challenge as best audit practice (Para 93-94).

Classification: SPPI and Business Model Tests Chapter IV Para 33–41

All investments (excluding subsidiaries, associates, JVs) must be classified at or before acquisition into HTM, AFS, or FVTPL, with HFT (Held for Trading) as a sub-category within FVTPL (Para 33). An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers. Classification is objective driven, not instrument type driven. Even identical ISINs bought in the same lot can be placed in different buckets if acquisition intent differs and is documented (Para 34 FAQ). SLR status does not determine classification and instruments failing SPPI go to FVTPL (Para 34 FAQ). Investments in subsidiaries, associates, and joint ventures are kept outside (held sui generis) the HTM/AFS/FVTPL classification framework and are subject to specified impairment and prudential checks. Impairment thresholds for these investments must be Board-approved, and monitoring sits at Board level rather than treasury bucket classification level (Chapter IV and Chapter II Para 8 read with Para 64).

An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers.

HTM eligibility requires intent to hold till maturity and SPPI compliant cash flows (Para 35). Instruments automatically failing SPPI and therefore barred from HTM/AFS include convertibles, Basel III AT1/Tier 2 loss-absorbent bonds, equity-linked coupon notes, and equity or preference shares unless an irrevocable AFS equity election is made (Para 36). Securitisation notes other than equity tranches can qualify for HTM/AFS if tranche cash flows are SPPI, the underlying pool is SPPI, and tranche credit risk is not higher than the pooled assets (Para 37). AFS classification requires dual intent (collect cash flows and sell the paper) plus SPPI compliance (Para 38). AFS bucket includes SPPI compliant debt securities held for ALM (asset–liability management) where the bank's intent is flexible i.e., to collect cash flows and can also be sold before maturity (Para 39). FVTPL is the residual class and includes Non-SPPIs, equities unless onetime AFS election, mutual funds, AIFs (Alternative Investment Funds), REITs, InvITs, equity tranches, and index-linked bonds tied to equity indices (Para 40).

HFT: The Active Trading Signals

HFT sits within FVTPL as a sub-category and demands daily fair valuation through P&L (Para 41(2)). Inclusion is presumed where securities are held for short-term resale, price movement gains, arbitrage, or hedging of trading books (Para 41(3)). Underwriting commitments expected to settle are included (Para 41(4)). Exclusions cover unlisted equities, securitisation warehousing, direct real estate, and equity funds unless look-through criteria are met (Para 41(6)). There must be no legal impediment to sale or fully hedge the HFT instruments (Para 41(1)). Unless specifically exempted, instruments arising from market-making, most fund equity exposures, listed equities, and trading-related repo-style transactions are presumed to be classified under HFT (Para 41(7)).

Liquidity and LCR: HTM Guardrails Chapter IV Para 35 & 38 FAQs

HQLA (High Quality Liquid Assets) as LCR holdings can sit in HTM if the bank does not routinely sell them. Repo usage is not inconsistent with HTM classification (Para 35 FAQ). However, if securities are intended for LCR monetisation and anticipated sales exceed 5% of opening HTM carrying value, they cannot be in HTM (Para 35 FAQ). Securities bought mainly for day-to-day liquidity management belong in AFS, while HTM is for structural ALM (Asset Liability Management) positions (Para 38 FAQ). Audit testing must validate SPPI assessments at acquisition, check classification consistency with behaviour, reconcile LCR holdings with HTM tagging, and can challenge borderline instruments like AT1, Tier 2, and structured notes.

Valuation: Fair Value Hierarchy Discipline Chapter IX Para 73–87

Valuation follows a three-level fair value hierarchy based on input observability. Level 1 uses unadjusted quoted prices in active markets (FBIL / NDS-OM traded prices) with no significant adjustments permitted (Para 73–75). Level 2 uses observable inputs other than direct quotes, such as yield curves, credit spreads, and matrix pricing for comparable instruments, with no significant unobservable inputs (Para 76–78). Level 3 relies on unobservable inputs (DCF (discounted cash flow) assumptions, recovery estimates, and model-based valuations) covering unquoted non-SLR securities, AIF units without daily NAV, and distressed debt without market prices (Para 79–87 in fragments).

Level 3 valuations run on unobservable inputs, so RBI hard wires capital conservatism into their gain recognition. Net unrealised gains on Level 3 investments recognised in P&L or AFS-Reserve must be fully deducted from CET1 capital and are not available for distribution (except where SPPI instruments carry ≤50% credit risk weight) (Chapter IX Para 87). Further, Day-1 gains on Level 3 instruments are not taken upfront (they are deferred or amortised) while Day-1 losses are recognised immediately, enforcing asymmetric prudence at entry (Chapter V Para 46–47). For Level 3 derivatives too, unrealised gains routed through P&L are deducted from CET1 and barred from dividend payout (Chapter XII Para 109-111). Audit must verify Level 1 marks, test Level 2 model governance, challenge Level 3 assumptions, and verify CET1 deductions and reporting/disclosures.

HTM securities are carried at amortised cost, not MTM, with premium/discount amortised over remaining life and subject to IRACP provisioning norms (Chapter V Para 48–49). AFS securities are fair-valued at least quarterly, with net unrealised gains/losses parked in AFS-Reserve (not P&L), premium/discount amortised, and post-sale gains moved to P&L (equity AFS gains to Capital Reserve) (Chapter V Para 50–55). FVTPL securities are fair-valued through P&L, with all valuation gains/losses recognised in earnings (Chapter V Para 56-58).

Operational Controls: Non-SLR and Dealing Framework Chapter X Para 88–94

Government securities must be held in demat form and settled via CCIL/NDS-OM, with STRIPS treated per norms. Short sale, When Issued and Value Free transfers should be in adherence with respective directions (Para 88–89). Non-SLR investments carry tighter filters: unlisted exposure capped at 10% of the non-SLR portfolio, limited headroom for infrastructure securitisations and ARC (Asset Reconstruction Company) paper, prohibition on zero coupon bonds with sinking fund exception, unrated exposures except defined infra contexts, and mandatory entry-level ratings supported by internal credit analysis (Para 90(1)–90(6)).

Internal controls require segregation of front office, back office, and risk, review for Level 2/3 instruments, and exception reporting for limit or valuation breaches. Banks must perform their own credit assessment and not rely solely on external ratings when investing in non-SLR paper (Para 90 credit due diligence clauses). Exposure look-through rules apply for MF/AIF units when underlying unlisted exposure ≥10% for limit computation (look-through rule). Internal control architecture must enforce front–mid–back-office segregation, ACB review, book reconciliation, and audit trail across investment operations. Broker engagement needs Board-approved empanelment and limits, with breach reporting to the Board (Para 94; Para 92(8)). Audit must reconcile non-SLR caps, inspect internal credit files, test segregation of duties, and verify reporting thresholds and timelines.

Prudential Treatment: Income, NPI, IFR Chapter XI Para 95–108

Interest income on performing investments is accrued. Dividend income can be recognised after declaration and with right to receive being established. Broken Period Interest (BPI) is treated as income or expense and not capitalised (Para 95–97). Investments become NPI when overdue >90 days or earlier if credit-impaired (Para 98). NPIs must be segregated from performing portfolios with no offsetting of gains against NPI losses and valued instrument wise with haircuts. Preference share dividend arrears and ₹1-valued equities (no financials) also trigger NPI tagging. Issuer-level stress linkage applies: if borrower exposure is NPA, the bank's investment in its securities is also treated as NPI, and vice-versa (Para 99–100).

Provision should be higher of IRACP (Income Recognition and Asset Classification Provisioning) norms or depreciation at NPI recognition (Para 101). Upgrades from NPI to standard require structured review and approval as per internal process. Central and State Government securities are never classified as NPI; Government-guaranteed paper turns NPI only if guarantee is repudiated (Para 104). Banks must maintain an Investment Fluctuation Reserve (IFR) of at least 2% of AFS + FVTPL portfolios as buffer, with limited Tier 2 capital recognition (Para 105-108). Audit must verify NPI registers, segregation logic, provisioning math, upgrade approvals, and IFR adequacy.

Trade smart, classify smarter, document smartest — that's the new carry trade, because strong treasury books are built in policy rooms before they show up on trading screens and management dashboards.

Conclusion