Every commercial bank in India sits on a mountain of surplus funds that cannot all be lent out to borrowers. Some of it has to be parked in safe, liquid assets, while the rest can be used to earn additional income through shares, bonds, and government securities. But banks cannot invest this money however they like. The Reserve Bank of India lays down detailed investment norms that decide what banks can buy, how much they can hold, and how these holdings must be valued and reported. Understanding these norms is central to grasping how commercial banks manage risk while staying profitable.
Table of Contents
Why RBI keeps a close watch on bank investments
A bank’s investment portfolio is not a side activity. It sits right next to loans and advances as one of the two major uses of depositor money, and it plays three roles at once: it helps the bank meet statutory liquidity requirements, it earns interest and capital gains income, and it acts as a cushion of easily sellable assets during a liquidity crunch.
Because deposits belong to the public, RBI cannot let banks treat this portfolio as a speculative trading book. The investment norms exist to make sure that the securities a bank holds are creditworthy, that price and interest rate risks are properly measured, and that no single bank builds up dangerous concentration in a risky asset. This is why every investment decision, from buying a government bond to picking up a corporate debenture, is governed by rules on eligibility, ceilings, and disclosure.
The board-approved investment policy
Before a bank can buy a single security, RBI requires it to have a written investment policy approved by its board of directors. This is not a formality. The RBI guidelines on classification and valuation of investments specifically ask banks to frame this policy so that it addresses risk management, keeps procedures transparent and well documented, and makes the entire process easy to verify for inspectors and statutory auditors.
The board-approved policy typically spells out things such as who can authorise a purchase or sale, the limits on exposure to a single issuer or sector, the criteria for shifting a security from one category to another, and how often the portfolio will be reviewed. Because the policy needs board sign-off, senior management cannot unilaterally change the bank’s risk appetite for investments. Any major shift, such as moving securities between categories, usually needs a fresh nod from the board or a designated committee like the Asset Liability Management Committee (ALCO).
Where can banks put their money: SLR and non-SLR investments
Bank investments broadly split into two buckets.
SLR investments come from the Statutory Liquidity Ratio requirement under the Banking Regulation Act, which forces every bank to hold a fixed percentage of its net demand and time liabilities in approved liquid assets such as government securities, treasury bills, and state development loans. As of 2026, the SLR stands at 18 percent, meaning banks must set aside close to a fifth of their deposit base in these safe instruments before they can lend or invest freely elsewhere.
Non-SLR investments cover everything else: shares, debentures, bonds of public sector undertakings, commercial paper, certificates of deposit, and units of mutual funds. These are riskier because they carry credit and market risk that government paper largely avoids, so RBI subjects them to tighter scrutiny.
Safeguards on non-SLR investments
RBI’s guidelines on non-SLR debt securities require banks to carry out proper due diligence before investing and prohibit them from putting money into unrated debt securities altogether. Listed non-SLR debt of companies that meet SEBI disclosure norms is generally permitted, while unlisted paper faces stricter conditions and caps tied to the bank’s own investment history.
| Safeguard | What it means for the bank |
|---|---|
| Ban on unrated paper | Banks cannot buy non-SLR debt securities that carry no credit rating from an approved agency |
| Ceiling on unlisted exposure | Investment in unlisted non-SLR securities is capped, historically around 10 percent of a bank’s total non-SLR book, to limit exposure to illiquid, hard-to-value paper |
| SEBI compliance check | Debt securities must follow SEBI’s disclosure and listing regulations before a bank can subscribe |
| End-use restriction | Banks must ensure funds raised through non-SLR securities are not used for purposes RBI otherwise restricts bank credit from financing |
These limits stop banks from chasing higher yields at the cost of taking on securities they cannot easily sell or accurately value, which matters a great deal during a market downturn.
Classifying the investment portfolio: HTM, AFS and HFT
Once a bank owns a security, it has to slot it into a category that determines how the security is valued in the books. For decades, Indian banks have classified their entire portfolio, barring investments in subsidiaries and joint ventures, into three buckets.
| Category | Intent | Valuation approach |
|---|---|---|
| Held to Maturity (HTM) | Securities the bank intends to hold until they mature, mainly government bonds supporting the SLR requirement | Carried at acquisition cost or amortised cost; not marked to market, so day-to-day price swings do not hit the profit and loss account |
| Available for Sale (AFS) | Securities that do not fit neatly into HTM or HFT, held with flexibility to sell if conditions change | Marked to market periodically, with the resulting gain or loss adjusted through reserves or income depending on the applicable accounting norm |
| Held for Trading (HFT) | Securities acquired specifically to profit from short-term price movements | Marked to market frequently, since the holding period is meant to be brief and the intent is purely trading gains |
This classification decision has to be made and documented at the time of acquisition itself, not decided later depending on how the market moves. Shifting a security between categories generally needs board or ALCO approval, and RBI has historically capped how much of the total portfolio can sit in the HTM bucket, since that category escapes daily mark-to-market discipline.
The framework is evolving
It’s worth knowing that RBI has been modernising this structure. Under the 2023 Master Direction on classification, valuation and operation of investment portfolios, effective from April 2024, banks now classify securities into HTM, AFS, and a broader Fair Value through Profit and Loss (FVTPL) category, with HFT treated as a distinct sub-category within FVTPL. The revision brings Indian banking closer to global accounting standards like Ind AS and IFRS 9, tightens the rules around shifting securities out of HTM, and introduces symmetric recognition of gains and losses. According to professional analysis of the revised Directions, any reclassification between categories now needs both board approval and the RBI’s supervisory sign-off, reinforcing just how seriously the regulator treats this decision. RBI has since consolidated this further through its 2025 Directions on classification, valuation and operation of investment portfolios, which strengthen governance, internal controls, and reporting requirements around the same three-way structure. For exam purposes, the traditional HTM, AFS, and HFT framework remains the foundation students need to understand, since the newer categories build directly on the same logic of intent-based classification.
What these norms protect against
Three risks sit at the heart of why these investment norms exist.
Interest rate risk arises because bond prices move opposite to interest rates. A bank holding long-term government securities in AFS or HFT can see the market value of its portfolio fall sharply if rates rise, which is exactly why frequent mark-to-market valuation is mandatory for those categories.
Default risk comes from non-SLR investments in corporate bonds, debentures, and commercial paper, where the issuer could fail to pay interest or principal. The ban on unrated securities and the ceilings on unlisted exposure are direct responses to this risk.
Liquidity risk is managed by keeping a portion of the portfolio, particularly SLR holdings and AFS securities, in instruments that can be sold quickly if the bank needs cash in a hurry. HTM securities, by contrast, are meant to be stable, income-generating assets rather than a source of quick liquidity.
Taken together, these norms try to strike a balance: banks need to earn a reasonable return on the funds they are not lending out, but that pursuit of return can never be allowed to threaten the safety of depositor money. That is the thread running through every rule on classification, ceilings, and board oversight covered above.
What do you think? If interest rates rise sharply, do you think the current HTM classification rules do enough to shield banks from mark-to-market losses on government bonds, or does keeping a large chunk of the portfolio outside daily valuation create a hidden risk? And should non-SLR investment limits for banks be tightened further as India’s corporate bond market matures?
References
- https://www.rbi.org.in/upload/Notification/pdfs/16445.pdf
- https://indiamacroindicators.co.in/economic-indicators/statutory-liquidity-ratio-slr
- https://www.rbi.org.in/upload/notification/pdfs/39786.pdf
- https://www.business-standard.com/amp/article/finance/ceiling-on-banks-exposure-to-unlisted-non-slr-papers-relaxed-110042100007_1.html
- https://taxguru.in/rbi/master-direction-classification-valuation-operation-investment-portfolio-commercial-banks-directions-2023.html
- https://uniqus.com/master-direction-classification-valuation-and-operation-of-investment-portfolio-of-commercial-banks-directions-2023/
- https://www.teamleaseregtech.com/updates/article/49984/reserve-bank-of-india-commercial-banks-classification-valuation-and-op/
Leave a Reply