investment policy guidelines

Investment Policy –
Satyajit Dwivedi
Member of Faculty
CAB, Pune
ACA-TM-37 (v2.2-20-Nov-10)
Front Office
• Deals in securities (Buy, Sale, & Repo
• Putting the bids in the auctions of Tbills 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 and
guidelines for transactions in securities
• Submission of reports to the top executives
• 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/ TBills/ 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,
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)
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 &
• 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 &
• 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
• 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)
• Maturity-wise investment requirement to be
• 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)
• Security-wise policy
How much to be invested in which type of
• 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
• 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
• 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
• 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
ACA-TM-37 (v2.2-20-Nov-10)
• 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)
• 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
• 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)
• The contract note to contain the name of the counter
• 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)
• 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)
• 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
• 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
• 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)
• Deals slips to be serially numbered and accounted
• No substitution of the counterparty once the deal is
• 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)
• 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
• 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
• 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
ACA-TM-37 (v2.2-20-Nov-10)
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