RBI master-direction RBI/DOR/2025-26/236 · 28 Nov 2025
Official title
Reserve Bank of India (Local Area Banks – Classification, Valuation and Operation of Investment Portfolio) Directions, 2025 (Updated as on May 18, 2026)
Official record
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Check the official recordThe Reserve Bank of India issued these Directions to govern the classification, valuation, and operational management of investment portfolios for Local Area Banks. Banks must classify their entire investment portfolio into Held to Maturity (HTM), Available for Sale (AFS), or Fair Value through Profit and Loss (FVTPL) categories, excluding investments in subsidiaries, associates, and joint ventures. The Board of Directors must approve the Investment Policy and oversee risk management. The Directions establish specific valuation methodologies, including fair value hierarchies, and mandate internal control systems for investment transactions. Banks must perform half-yearly reviews of their portfolios and report to the Reserve Bank. These Directions replace previous guidelines and take effect immediately.
What you must do
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RBI/DOR/2025-26/236 DOR.MRG.REC.No.155/00-00-001/2025-26 November 28, 2025
Previous Versions
Reserve Bank of India (Local Area Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 (Updated as on May 18, 2026)
In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, (‘BR Act’) and all other provisions / laws enabling the Reserve Bank of India (‘RBI’) in this regard, the RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby issues the Directions hereinafter specified.
Note: Mere mention of an activity, transaction, or item in these directions does not imply that it is permitted, and the bank shall refer to the extant statutory and regulatory requirements while determining the permissibility or otherwise of an activity, transaction, or item.
(1) ‘Active market’ is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Explanation: The test for active market is done with reference to the instrument rather than the entire market. For instance, if a particular listed equity share is not traded / thinly traded on an exchange where other shares are actively traded, this particular share cannot be said to have an active market.
(2) ‘Approved Securities’ shall have the same meaning as defined in Reserve Bank of India (Local Area Banks – Cash Reserve Ratio and Statutory Liquidity Ratio) Directions, 2025.
(3) ‘Associate’ as defined in Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements (‘AS 23’) is an enterprise in which the investor has significant influence, and which is neither a subsidiary nor a joint venture of the investor.
Explanation: For the purpose of this definition, the expression ‘significant influence’ is the power to participate in the financial and / or operating policy decisions of the investee but not control over those policies. Significant influence is presumed if an investor holds, directly or indirectly through subsidiary / subsidiaries, 20 per cent or more of the voting power of the investee. A bank may refer to AS 23 for further guidance on the term ‘Associate’.
(4) ‘Carrying cost’ in the context of zero-coupon discounted instruments such as Treasury Bills, Commercial Papers, Certificate of Deposits, and Zero-Coupon Bonds is the acquisition cost adjusted for the discount accrued at the rate prevailing at the time of acquisition.
(5) ‘Corporate bonds and debentures’ mean debt securities which create or acknowledge indebtedness, including (a) debentures, (b) bonds, (c) commercial papers, (d) certificate of deposits, and such other securities of a company, a multilateral financial institution, or a body corporate constituted by or under a Central Act or a State Act, whether constituting a charge on the assets of the company or body corporate or not, and includes convertible instruments and instruments of a perpetual nature, but does not include (a) debt securities issued by Central Government or a State Government, or such other persons as may be specified by the Reserve Bank, (b) security receipts, and (c) securitisation notes.
(6) ‘Current and Valid Credit Rating’ for the purpose of determining rated security means a credit rating granted by a credit rating agency in India, registered with the Securities and Exchange Board of India (SEBI) and fulfilling the following conditions: i. The credit rating letter and rating rationale from the credit rating agency shall preferably be part of the offer document. ii. The credit rating letter shall not be more than one month old and rating rationale shall not be more than one year old from the date of opening of issue. iii. In the case of secondary market acquisition, the credit rating of the issue shall be in force and confirmed from the monthly bulletin published by the respective credit rating agency.
Explanation: In the case of overseas investments, the rating used shall be of the international credit rating agencies specified for the purpose of risk weighting for capital adequacy.
(7) ‘Day 1 Gain’ is the difference between the fair value at initial recognition and acquisition cost where such fair value exceeds the acquisition cost.
(8) ‘Day 1 Loss’ is the difference between acquisition cost and the fair value at initial recognition where the acquisition cost exceeds such fair value.
(9) ‘Derecognition’ means the removal of a previously recognized financial instrument from a bank’s Balance Sheet.
(10) ‘Derivative’ shall have the same meaning as assigned to it in Section 45U(a) of the Reserve Bank of India Act, 1934 (‘RBI Act’), as amended from time to time.
(11) ‘Discount’ in the context of debt securities that meet the solely payments of principal and interest (‘SPPI’) criteria shall mean the difference between the face value of a debt security and the amount at which that security has initially been recognised in the books.
(12) ‘Exchange’ means ’Recognized stock exchange’ and shall have the same meaning as defined in Section 2 (f) of Securities Contracts (Regulation) Act, 1956, as amended from time to time. In the case of overseas jurisdictions, it shall refer to an exchange which is recognised or authorised by the securities market regulator of that jurisdiction.
(13) ‘Fair value’ means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.
(14) ‘Financial asset’ is any asset that is cash, the right to receive cash or another financial asset, or an equity instrument.
(15) ‘Financial instrument’ is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments.
(16) ‘Financial liability’ is the contractual obligation to deliver cash or another financial asset.
(17) ‘Government Security’ shall have the same meaning as assigned to it in Section 2(f) of the Government Securities Act, 2006, as amended from time to time.
(18) ‘Interest’ for the purpose of determining eligibility under the solely payments of principal and interest (‘SPPI’) criteria consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.
