What changed
RBI issued specific guidelines on assessing permanent diminution in investments in subsidiaries/joint ventures, filling a gap where no method existed earlier. It lists clear triggers for impairment assessment: default, loan restructuring, rating downgrade to below investment grade, or three consecutive years of losses reducing net worth by 25% or more. For new companies/projects, failure to achieve break-even within the original gestation period also triggers assessment.
What it means for you
Banks and FIs must now proactively monitor strategic equity investments for impairment, not just rely on market prices. This will likely increase provisioning for underperforming subsidiaries or joint ventures, impacting reported profits. The requirement for a qualified valuer adds cost and rigor to the process.
What you must do
- Review all strategic equity investments in subsidiaries and joint ventures held under HTM or AFS categories for impairment triggers.
- Establish a continuous monitoring process for events like default, restructuring, rating downgrade, or sustained losses.
- Obtain valuation from a reputed/qualified valuer when impairment indicators are present and make necessary provisions.
- Update internal policies and systems to align with these guidelines effective immediately.
Who it affects
All-India Term Lending and Refinancing Institutions (Exim Bank, NABARD, NHB, SIDBI), Banks with investments in subsidiaries/joint ventures
What triggers the need to assess permanent diminution?
Triggers include the subsidiary/JV defaulting on debt, loan restructuring, credit rating downgrade to below investment grade, or incurring losses for three consecutive years reducing net worth by 25% or more. For new entities, failure to achieve break-even within the original gestation period also triggers assessment.
How should impairment be measured?
When impairment is indicated, the FI must obtain a valuation of the investment from a reputed or qualified valuer and make provision for the impairment amount.
Does this apply to all investments or only strategic ones?
The guidelines specifically address strategic equity investments in subsidiaries and joint ventures held under Held to Maturity (HTM) or Available for Sale (AFS) categories.