investment policy guidelines

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Investment Policy –
RRBs/SCBs/CCBs
Satyajit Dwivedi
Member 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 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
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/ 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)
statutory
and
RBI
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 policy
How 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
ACA-TM-37 (v2.2-20-Nov-10)
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