RBI/2010-11/395
DBOD. No. BP.BC.79/21.04.141/2010-11
January 31, 2011
The Chairmen and Managing Directors/
Chief Executive Officers of
All Commercial Banks
(excluding Regional Rural Banks)
Dear Sir,
Recognition of permanent diminution in the value of
investments in banks’ subsidiaries/joint ventures
In terms of para 15 of Annexure to circular
DBOD.No.BP.BC.32/21.04.048/2000-2001 dated October 16, 2000 on ‘Guidelines for
Classification and Valuation of investments by Banks’, banks are required to
recognise any diminution, other than temporary, in the value of their
investments in subsidiaries/ joint ventures which are included under Held to
Maturity category and provide therefor. However, in the absence of any specific
instructions on the method of assessment/measurement of permanent diminution, it
has been observed that banks are not making any attempt to determine whether
there is any permanent diminution in their strategic equity investments held
under HTM or AFS categories.
- The need to determine whether impairment has occurred is a continuous
process and the need for such determination will arise in the following
circumstances:
- On the happening of an event which suggests that impairment has
occurred. This would include:
- the company has defaulted in repayment of its debt obligations.
- the loan amount of the company with any bank has been
restructured.
- the credit rating of the company has been downgraded to below
investment grade.
- When the company has incurred losses for a continuous period of three
years and the net worth has consequently been reduced by 25% or more.
- In the case of new company or a new project when the originally
projected date of achieving the breakeven point has been extended i.e., the
company or the project has not achieved break-even within the gestation
period as originally envisaged.
- When the need to determine whether impairment has occurred arises in
respect of a subsidiary, joint venture or a material investment, the bank
should obtain a valuation of the investment by a reputed/qualified valuer
and make provision for the impairment, if any.
- These guidelines would be applicable with immediate effect.
Yours faithfully,
(B. Mahapatra)
Chief General Manager-in-Charge