A bank proposes to shift certain Government securities from the "Available for Sale” (AFS) category to the "Held to Maturity” (HTM) category. The…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · November 2026
A bank proposes to shift certain Government securities from the "Available for Sale” (AFS) category to the "Held to Maturity” (HTM) category. The securities satisfy the conditions for classification as HTM, and the ALCO has approved the proposed shift. However, no approval of the Board of Directors has been obtained. The management contends that the absence of Board approval should not affect the classification since the securities otherwise qualify for HTM. Which of the following is the most appropriate treatment?
(A) (a) The securities may be classified as HTM, since compliance with the eligibility conditions for HTM is the primary requirement and the approval of ALCO provides adequate internal authorisation for the transfer.
(B) (b) The securities cannot be transferred to HTM merely on the basis of ALCO approval, since the prescribed approval requirements for such transfer must be complied with in addition to the eligibility conditions for HTM classification.
(C) (c) The securities may be classified as HTM if the bank discloses the absence of Board approval and demonstrates that its intention to hold the securities until maturity existed at the time of their original acquisition.
(D) (d) The securities should continue to be classified as AFS only for the year of transfer and may thereafter be classified as HTM once the Board subsequently approves the transfer.

Suggested Answer and Working Notes:

Correct Answer: Option (B)

As per RBI guidelines for classification of investments by banks, the transfer of securities between investment categories (e.g., AFS to HTM) requires compliance with specific conditions, including internal approval processes. While the securities may satisfy the eligibility conditions for HTM classification and ALCO (Asset Liability Management Committee) approval provides internal authorization, Board of Directors' approval is a critical governance requirement for such significant reclassifications. The absence of Board approval indicates a failure to comply with the prescribed approval requirements. Even if the securities meet other criteria, the lack of proper authorization makes the transfer incomplete or invalid from a regulatory and governance perspective. Therefore, the securities cannot be transferred to HTM merely on the basis of ALCO approval, since the prescribed approval requirements for such transfer must be complied with in addition to the eligibility conditions for HTM classification.

Topics: Special Features of Audit of Banks & Non-Banking Financial Companies

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