Investment Classification of Bank Portfolios: HTM, AFS, HFT and the Revised RBI

The investment classification of bank portfolios is one of the most critical topics in treasury management. And it forms a significant part of the IIBF Treasury Investment. Risk Management (TREASURYINVE) certification syllabus.

Indian banks are required to classify their investment portfolios according to guidelines issued by the Reserve Bank of India (RBI). And understanding these categories. Along with the revised framework effective from April 2024.

Is essential for every banker appearing for JAIIB. CAIIB, or any IIBF certification exam. This article breaks down the traditional HTM/AFS/HFT categories.

The new FVTPL/FVOCI/AC framework. Mark-to-market valuation principles, and their implications for SLR compliance and risk management.

Traditional RBI Investment Classification: HTM, AFS, and HFT

Until the revised framework came into effect. Indian banks classified their investment portfolios into three categories as per RBI guidelines. This traditional system. Borrowed from international accounting practices. Divided investments based on the holding intent and valuation methodology applied.

Held to Maturity (HTM) is the category for securities that a bank intends. Is able to hold until their maturity date. Key characteristics include:

• Valued at acquisition cost or amortised cost. No mark-to-market impact on profit and loss.
• Premium or discount on acquisition is amortised over the remaining life of the security.
• Transfer into or out of HTM is restricted. Permitted only at the start of the financial year or under specific RBI-approved circumstances.
• Profits or losses on sale of HTM securities are recognised in the Profit. Loss account and cannot be netted.
• A significant portion of a bank's SLR (Statutory Liquidity Ratio) securities. Typically Government Securities (G-Secs) and State Development Loans (SDLs). Is kept in HTM to avoid mark-to-market volatility.

Available for Sale (AFS) covers securities not classified in HTM or HFT. These securities are:

• Marked to market periodically — unrealised depreciation is recognised as an expense. While unrealised appreciation is ignored (prudent accounting).
• Valued individually by type of security at the lower of book value or market value.
• Net depreciation within each category is charged to P&L. Net appreciation is ignored. Maintaining asymmetric treatment.

Held for Trading (HFT) is reserved for securities acquired with the intention to trade within a short horizon (originally 90 days). HFT securities are marked to market on a daily basis. With both gains and losses flowing directly through Profit and Loss. Banks are expected to manage HFT positions actively. Must have robust trading desks and risk management systems in place.

The Revised RBI Investment Classification Framework (Effective April 2024)

The RBI issued a revised Master Direction on Classification. Valuation. And Operation of Investment Portfolio of Commercial Banks.

Which came into effect from 1 April 2024. This revision aligns Indian banking practice more closely with International Financial Reporting Standards (IFRS 9). Introduces a modernised three-category investment classification system:

1. Held to Collect (HTC). Amortised Cost (AC) This category corresponds broadly to the old HTM.

Securities held under HTC/AC are measured at amortised cost using the Effective Interest Rate (EIR) method. The key test for HTC classification is the "Solely Payments of Principal. Interest" (SPPI) test.

The contractual cash flows from the instrument must consist only of principal repayments. Interest on outstanding principal. If a security passes the SPPI test.

The bank's business model is to collect contractual cash flows. It qualifies for AC measurement. There is no mark-to-market volatility for HTC/AC securities under normal circumstances.

2. Held to Collect and Sell (HTCS). Fair Value through Other Comprehensive Income (FVOCI) FVOCI replaces the old AFS category.

Securities classified here pass the SPPI test. The bank's business model involves both collecting cash flows and selling securities. Under FVOCI:

• Fair value changes are recognised in Other Comprehensive Income (OCI). A separate component of equity — rather than directly in Profit and Loss.
• Unrealised gains. Losses accumulate in an AFS Reserve (now formally an OCI reserve). Are reclassified to P&L only on sale or impairment.
• Interest income is recognised using EIR. Flows through P&L normally.
• Expected Credit Loss (ECL) provisions are also recognised through P&L.

3. Fair Value through Profit or Loss (FVTPL) FVTPL is the residual category for securities that do not qualify for AC or FVOCI. Either because they fail the SPPI test (e.g..

Equity shares. Complex structured products) or. The bank designates them at FVTPL to eliminate accounting mismatches.

All fair value changes flow directly through Profit and Loss. This broadly aligns with the old HFT but is wider in scope. FVTPL securities require the most rigorous mark-to-market valuation on a daily or periodic basis.

For IIBF exam aspirants preparing for TREASURYINVE, you can deepen your practice with IIBF mock tests and practice questions covering treasury and risk management topics in detail.

Mark-to-Market Valuation: Principles and Practical Implications

Mark-to-market (MTM) valuation. Also called fair value measurement. Is the process of valuing an investment at its current market price rather than its historical cost.

Understanding MTM is central to any investment classification framework. The category determines how. When market value changes affect a bank's financial statements.

Under the revised framework. The sources and hierarchy for fair value measurement are:

1. Level 1 inputs: Quoted prices in active markets (e.g.. Traded G-Secs on NDS-OM, listed equity shares on BSE/NSE). This is the most reliable and preferred source.
2. Level 2 inputs: Observable inputs other than Level 1. Such as quoted prices for similar instruments. Benchmark yield curves (e.g.. The FBIL G-Sec yield curve), credit spreads for similar issuers.
3. Level 3 inputs: Unobservable inputs based on internal models and assumptions. Used only when Level 1 and Level 2 data are not available.

For Government Securities (G-Secs). The Financial Benchmarks India Private Limited (FBIL) prices are the standard reference for mark-to-market valuation. For corporate bonds and debentures.

Prices published by FIMMDA (Fixed Income Money Market. Derivatives Association of India) are used. When market prices are unavailable.

Banks use matrix pricing based on spread over comparable G-Sec yields.

The practical implications of MTM for banks are significant:

• Rising interest rates cause bond prices to fall. Creating MTM losses on AFS/FVOCI and FVTPL portfolios.
• Banks with large AFS portfolios are exposed to interest rate risk through the P&L (old regime) or OCI (new regime under FVOCI).
• HTM/AC portfolios insulate earnings from day-to-day rate movements. Require the bank to genuinely hold securities to maturity. Transfer out of HTM/AC is closely monitored by RBI.
• Proper duration management. Hedging through Interest Rate Swaps (IRS) or Interest Rate Futures (IRF) are key tools for managing MTM risk in the AFS/FVOCI. HFT/FVTPL books.

Build your understanding further with RBI rate resources on iibf.store to track how policy rate movements affect G-Sec yields and MTM valuations in real time. For JAIIB preparation including treasury basics, explore the JAIIB course on iibf.store.

SLR, G-Sec Portfolio, and AFS Reserve: Exam-Critical Concepts

The Statutory Liquidity Ratio (SLR) requires banks to maintain a minimum proportion of their Net Demand. Time Liabilities (NDTL) in approved securities. Predominantly Government Securities (G-Secs) and State Development Loans (SDLs). The investment classification of these SLR securities has direct bearing on both regulatory compliance. Profit volatility.

Under the revised framework. RBI has prescribed the following key operational rules for the investment portfolio:

• Banks may classify SLR securities in any of the three categories (AC. FVOCI. Or FVTPL). But the majority is expected to be in AC (HTC) to minimise MTM volatility. Consistent with the RBI's financial stability objectives.
• The total HTM/AC holdings. As a percentage of total investments. Are subject to a ceiling prescribed by RBI. Banks need RBI approval to exceed the ceiling in the old regime. The revised framework provides more structured guidance.
• Transfer of securities between categories is permitted only at the beginning of the financial year. And any profit/loss on such transfer is recognised immediately. Switching is not permitted during the year except in specified extraordinary circumstances.
• The AFS Reserve (now the OCI Reserve under FVOCI) is a balance sheet buffer that absorbs fair value fluctuations of FVOCI securities. This reserve is not available for dividend distribution. Serves as a prudential cushion against interest rate risk.

For treasury officers and candidates for the TREASURYINVE certification. The relationship between SLR management. HTM/AC classification, and duration risk is a favourite examination area. Banks that aggressively shift SLR securities out of AC into FVOCI or FVTPL expose their OCI or P&L to interest rate movements. A tradeoff between liquidity flexibility and earnings stability.

Non-SLR investments — including corporate bonds. Commercial paper. Units of mutual funds.

Equity shares, and foreign securities — have their own classification rules. Equity shares not meeting the SPPI test are mandatorily classified at FVTPL. Mutual fund units are similarly marked to market through P&L.

Banks maintain separate sub-ledgers for each investment category. And the investment policy approved by the board must specify the rationale for classification decisions.

Stay updated on treasury and regulatory developments via IIBF news and updates. Advanced candidates preparing for CAIIB can access the full CAIIB course on iibf.store, which covers treasury risk management in depth. You can also sharpen your conceptual clarity with match-the-concept games on iibf.store and browse other articles at the iibf.store blog.

Frequently Asked Questions

A thorough command of investment classification — spanning both the legacy HTM/AFS/HFT system and the revised AC/FVOCI/FVTPL framework introduced by the RBI — is indispensable for success in the IIBF TREASURYINVE exam and for any treasury professional managing a bank's investment book. The authoritative source for RBI guidelines on this subject is the Reserve Bank of India's official website, where the Master Direction on Classification, Valuation, and Operation of Investment Portfolio of Commercial Banks is published. To test your exam readiness on treasury investment topics, practice with IIBF mock tests on iibf.store — the most comprehensive question bank for Indian banking certification aspirants.

For more on investment classification. See the official IIBF circulars. Our chapter-wise free notes on iibf.store.