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Friday, Jan 11, 2002

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Banks told to shift gains on gilts to reserve a/c

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MUMBAI, Jan. 10

THE Reserve Bank of India on Thursday directed banks to transfer maximum amount of gains realised on sale of securities to their Investment Fluctuation Reserve (IFR) account.

The RBI directive assumes significance in the light of sharp decline in yields in the Government securities market.

The measure is aimed at providing a cushion for banks against a possible reversal of the interest rate scenario, bankers said. In the mid-term review of monetary and credit policy for 2001-02, the RBI had cautioned banks on the need for following a more prudent policy for utilising the gains realised on sale of investment in securities arising during falling interest rates scenario. The credit policy had also underlined the need for building up reserves to guard against any possible reversal of the interest rate environment in future due to unexpected developments.

In its guidelines, the RBI said the objective should be to achieve IFR of a minimum of five per cent of the portfolio, by transferring the gains realised on sale of investment, within a period of five years.

The central bank, has however, said that banks are free to build up a higher percentage of IFR of up to 10 per cent of the portfolio depending upon its size and composition, in concurrence with their boards.

Banks should also ensure that the unrealised gains on valuation of the investment portfolio are not taken to the income account or to the IFR.

The RBI has also said that individual scrips held under the `available for sale category' should be marked to market at least at quarterly intervals.

Banks have been advised to assess the impact of changes in interest rates on their investment portfolio and have also been told to fix a definite timeframe for moving over to VAR and duration methods for measurement of interest rate risk.

Banks can continue to transfer balances from the IFR to the profit and loss account to meet the depreciation requirement on investment as a ``below the line item.''

The new guidelines on investment fluctuation reserve is a revision of the RBI's earlier directive in 1999 that banks appropriate excess provision towards depreciation on investments to the IFR instead of the capital reserve account.

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