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New norms to hit FIs profits - Views on News from Equitymaster
 
 
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  • Nov 23, 2000

    New norms to hit FIs profits

    The Reserve Bank of India (RBI) has recently changed the investment valuation norms for banks. As per the RBI guidelines, banks, which had to mark 100% of their portfolio to market, now could mark 75% of their portfolio. This is expected to reduce the bank’s mark to market losses on investment portfolio in future. Now the RBI has come out with the change in the investment valuation norms for financial institutions (FIs), with a minor change in regard to their equity portfolio. Unlike banks, FIs will not be required to mark to market their equity exposure to project finance up to two years from the date of launch of commercial production or up to five years from the date of acquisition of shares, which ever is earlier. Since most of the FIs are now shifting their investment portfolio from project finance to corporate finance (which has a short -term duration), this move is expected to benefit FIs (ICICI and ICBI) to a certain extent.

    According to the new guidelines, FIs are also required to classify their investments under three categories ‘held to maturity’, ‘available for sale’ and ‘held for trading’ in line with banks. This move of RBI will be effective from March 2001. FIs investments mainly include government securities, shares, debentures, bonds, investment in commercial paper and mutual fund units.

    While the valuation of securities under the ‘held to maturity’ category (up to 25% of the investment portfolio) need not be marked to market, securities under the other two categories should be marked to market at a year-end or more frequent levels.

    This could hit the bottomline of FIs adversely as they are now required to make higher provisions for the depreciation in the value of their investments. As until now these investments are treated by FIs as credit substitutes.

    Investment portfolio
    (Rs m) ICICI IDBI
    Government securities 560 8,775
    In shares, bonds and debentures of    
    Financial Institutions 7,919 30,809
    Industrial Concerns 96,652 56,581
    Investment in subsidiary companies 4,506 -

     

     

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