The
Presidents/Chief Executives
All Banks/ DFIs
Dear
Sirs/Madam,
REVALUATION
SURPLUS / DEFICIT
In terms of Para 6(i) of the Prudential
Regulation R-8, banks/DFIs are required to revalue their
investments
in Government Securities, TFCs, PTCs and shares, and provide
for the diminution in their value. Furthermore, in terms
of BSD Circular No.20 dated the 4th August, 2000, banks/DFIs
are required to revalue their security holdings and any
surplus/deficit arising thereof is required to be taken
to a separate account called “Surplus/Deficit on
Revaluation of Securities” except when actually realized.
Pakistan Banks’ Association (PBA) has recently requested
the State Bank to further streamline the instructions on
the subject.
2)
The matter has been reviewed in consultation with PBA
and it has been decided that banks/DFIs will classify their
entire investment portfolio into ‘Held to Maturity’, ‘Available
for Sale’ and ‘Held for Trading’ securities
as under:
Held
to Maturity : The securities acquired by the banks/DFIs
with the intention and ability to hold them upto maturity.
Held
for Trading : The securities acquired by the banks/DFIs
with the intention to trade by taking advantage of short-term
market/interest rate movements. Such securities are to
be sold within 90 days from the date of their classification
as ‘Held for Trading’ under normal circumstances.
Available
for Sale : The securities which do not fall
within the above two categories will be classified under
this category.
3) The banks/DFIs shall decide the category of the investment
at the time of acquisition and the decision taken to that
effect shall be recorded in writing on the investment proposals.
The existing investment portfolio shall also be classified
into the above categories. However, banks/DFIs will be
free to determine the extent of holding under the above
categories taking into consideration various aspects such
as trading strategies, intention of acquisition of securities,
capital position, expertise available to manage investment
portfolio, and the risk management capabilities, etc.
4) The banks/DFIs will not resort to frequent shifting
of securities from one category to another to take undue
advantage of fluctuation in the market/ interest rates.
Under exceptional circumstances, shifting from one category
to another will be allowed subject to the following conditions:
i)
Shifting of investments to/from ‘Held to Maturity’ category
will be allowed once a year only with the approval of the
Board of
Directors (Country Head in case of branches of foreign
banks) within two months of the commencement of the accounting
year. Any further shifting to/from this category will not
be allowed during the remaining part of that accounting
year.
ii)
Shifting to/from ‘Available for Sale’ category
will be allowed with the approval of the ALCO subject to
the condition that the reasons for such shifting will be
recorded in writing.
iii)
Shifting of investment from ‘Held for Trading’ category
to ‘Available for Sale’ or ‘Held to Maturity’ categories
would generally not be allowed. It would be permitted under
exceptional circumstances like not being able to sell the
securities within the prescribed period of 90 days due
to tight liquidity position in the market or extreme market
volatility with the approval of the ALCO. The justification
for such exceptional shifting of securities shall be recorded
in the minutes of the ALCO meeting, which shall be reviewed
by the SBP inspectors during the onsite inspection.
Shifting of securities from one category to another shall
be done in accordance with the above guidelines and at
the lower of the market value or the acquisition cost/book
value, and the diminution in value, if any, on such transfer
shall be fully provided for. Valuation of the securities
shall continue to be done in accordance with the instructions
contained in BSD Circular No.20 dated the 4th August 2000.
5)
The surplus/deficit arising as a result of revaluation
of ‘Held for Trading’ securities shall be taken
into Profit & Loss Account. Furthermore, the surplus/deficit
on revaluation of ‘Available for Sale’ and ‘Held
to maturity’ securities shall be taken to “Surplus/Deficit
on Revaluation of Securities” Account. However, any
permanent diminution in the value of ‘Available for
sale’ or ‘Held to Maturity’ securities
will be provided for by charging it to the Profit & Loss
Account. The measurement of surplus/deficit shall be done
on portfolio basis for each of the above three categories
separately.
6) Para 6(i) of Prudential Regulation R-8 of Prudential
Regulations for Corporate/Commercial Banking will stand
amended accordingly. All other instructions on the subject
shall remain unchanged.