Government of Pakistan
State of Bank Pakistan
July 13, 2004
BSD Circular No. 10 of 2004
The Presidents/Chief Executives
All Banks/ DFIs
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.