Addressed to the Chairman of all
RRBs /Sponsor Banks

Dear Sir,

Please refer to our circular RPCD.No.RRB.BC.76/03.05.34/1996-97 dated December 13, 1996 regarding avenues of investment of surplus Non-SLR funds of Regional Rural Banks in terms of which RRBs are permitted to invest their non-SLR surplus funds in certain avenues subject to the terms and conditions laid down from time to time. Paragraph 133 of the Statement on Monetary and Credit Policy for the year 2002-03 emphasized that banks should observe further prudence in order to contain the risk arising out of non-SLR investment portfolio of banks .

2. SEBI has since advised the guidelines required to be complied with by listed companies making issue of debt securities on a private placement basis and listed on al stock exchange vide circular SEBI/MRD/SE/AT/36/2003/30/9 dated September 30, 2003.

3. In order to contain the risks arising out of non-SLR investment portfolio of banks, in particular through private placement, we enclose in the Annex the draft guidelines proposed to be issued by the Reserve Bank on banks’ investment in non-SLR debt securities which, inter alia, covering the following:

1. the need for strengthening the internal rating systems,



2. fixing prudential limits,


3. review by the Board, and


4. disclosures in ‘Notes on Accounts’ to the balance sheet.

4. A copy of the draft guidelines are also placed on the Reserve Bank website (www.rbi.org.in). You may please furnish your feedback on the above draft guidelines within a week from the date of this letter to enable us to finalise the proposed guidelines.

1. These guidelines cover banks’ investments in Non-SLR debt instruments / securities issued by corporates, banks, All India Financial Institutions and State and Central Government sponsored institutions, etc. The guidelines will apply to investments both in the primary market as well as the secondary market. It may be noted that banks should not invest in Non-SLR debt securities of original maturity of less than one-year other than Commercial Paper and Certificates of Deposits which are covered under RBI guidelines.

2. Definitions of a few terms used in these guidelines have been furnished in Appendix I with a view to ensure uniformity in approach while implementing the guidelines.

3. Banks should undertake usual due diligence in respect of investments in non-SLR securities. Present RBI regulations preclude banks from extending credit facilities for certain purposes. Banks should ensure that such activities are not financed by way of funds raised through the non-SLR securities.

4. Banks must not invest in unrated debt securities, unlisted securities and unlisted shares of All India Financial Institutions(AFIs)

5. The Securities Exchange Board of India (SEBI) vide their circular dated September 30, 2003 have stipulated requirements that listed companies are required to comply with for making issue of debt securities on a private placement basis and listed on a stock exchange. According to this circular any listed company, making issue of debt securities on a private placement basis and listed on a stock exchange, has to make full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act 1956, SEBI (Disclosure and Investor Protection) Guidelines, 2000 and the Listing Agreement with the exchanges. Furthermore, the debt securities shall carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the SEBI. Banks should ensure that they make all fresh Non-SLR debt investments only in listed debt securities of companies which comply with the requirements of the SEBI circular dated September 30, 2003.

6. Since non-SLR securities are mostly in the form of credit substitutes, banks are advised to (i) subject all their investment proposals relating to non-SLR securities to credit appraisal on par with their credit proposals, irrespective of the fact that the proposed investments may be in rated securities, (ii) make their own internal credit analysis and rating even in respect of rated issues and that they should not entirely rely on the ratings of external agencies, and (iii) strengthen their internal rating systems which should also include building up of a system of regular (quarterly or half-yearly) tracking of the financial position of the issuer with a view to ensuring continuous monitoring of the rating migration of the issuers/issues.

7. The Board of Directors of banks should fix a prudential limit for their total investment in non-SLR securities subject to existing limits prescribed by RBI and sub-limits for the following debt securities:

1. bonds of public sector undertakings



2. bonds / equity of All India Financial Institutions


3. unsecured redeemable bonds floated by nationlised banks


4. infrastructure bonds floated by All India financial Institutions


5. units of UTI

The total investments in (a) to (d) above should not exceed 10 per cent of the banks total deposits as on March 31, of the previous year, with a sub-ceiling of 5 per cent of incremental deposits for investments covered under (e).

8. Banks which have exposure to investments in non-SLR securities in excess of the prudential limit prescribed above as on 31st March 2003 should not make any fresh investment in such securities till they ensure compliance with the above prudential limit.

9. As a matter of prudence, banks should stipulate entry-level minimum ratings/ quality standards and industry-wise, maturity-wise, duration-wise, issuer-wise etc. limits to mitigate the adverse impacts of concentration and the risk of illiquidity.

10. Banks should ensure that their investment policies duly approved by the Board of Directors are formulated after taking into account all the relevant issues specified in these guidelines on non-SLR investment. Banks should put in place proper risk management systems for capturing and analysing the risk in respect of non-SLR investment and taking remedial measures in time. Banks should also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under respective bank’s investment policy.

11. The Board should devise a system to ensure that the limits prescribed in paragraphs 7 above are scrupulously complied. The Boards should appropriately address the issue of ensuring compliance with the prudential limits on an ongoing basis, including breaches, if any, due to rating migration.

12. Boards of banks should review the following aspects of non-SLR investment twice a year:

1. Total business (investment and divestment) during the reporting period



2. Compliance with the prudential limits prescribed by the Board for non-SLR investment


3. Rating migration of the issuers/ issues held in the bank’s books and consequent diminution in the portfolio quality


4. Extent of non performing investments in the non-SLR category

13. In order to help in the creation of a central database on private placement of debt, a copy of all offer documents should be filed with the Credit Information Bureau (India) Ltd. (CIBIL) by the investing banks. When banks themselves raise debt through private placement, they should also file a copy of the offer document with CIBIL.

14. Banks should disclose the details of the issuer composition of non-SLR investments and the non-performing non-SLR investments in the ‘Notes on Accounts’ of the balance sheet, as indicated in Appendix II.

15. RRBs should make investment in non-SLR securities in dematerialised form only.

16. As per the SEBI guidelines, all trades with the exception of the spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. In addition to complying with the SEBI guidelines, banks should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the CCIL from a date to be notified by RBI.

Guidelines on investments by RRBs in non-SLR investment portfolio – Definitions

1. With a view to imparting clarity and to ensure that there is no divergence in the implementation of the guidelines, some of the terms used in the guidelines are defined below.

2. A security will be treated as rated if it is subjected to a detailed rating exercise by an external rating agency in India which is registered with SEBI and is carrying a current or valid rating. The rating relied upon will be deemed to be current or valid if

1. The credit rating letter relied upon is not more than one month old on the date of opening of the issue, and



2. The rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and


3. The rating letter and the rating rationale is a part of the offer document.


4. In the case of secondary market acquisition, the credit rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.

Securities which do not have a current or valid rating by an external rating agency would be deemed as unrated securities.

3. The investment grade ratings awarded by each of the external rating agencies operating in India would be identified by the IBA/ FIMMDA. These would also be reviewed by IBA/ FIMMDA at least once a year.

4. A ‘listed’ debt security is a security which is listed in a stock exchange. If not so, it is an ‘unlisted’ debt security.

5. A non performing investment (NPI), similar to a non performing advance (NPA), is one where

1. Interest/ instalment (including maturity proceeds) is due and remains unpaid for more than 180 days. The delinquency period would become 90 days with effect from 31^st March 2004.



2. The above would apply mutatis-mutandis to preference shares where the fixed dividend is not paid.


3. In the case of equity shares, in the event the investment in the shares of any company is valued at Re.1 per company on account of the non availability of the latest balance sheet , those equity shares would also be reckoned as NPI.


4. If any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities issued by the same issuer would also be treated as NPI.

Prudential guidelines on management of the non-SLR investment portfolio by RRBs – Disclosures requirements

Banks should make the following disclosures in the ‘Notes on Accounts’ of the balance sheet in respect of their non-SLR investment portfolio, with effect from the financial year ending 31 March 2004.