The Hindu Business Line : Banks seek relaxation in norms for creation of IFR

IN a bid to improve distributable profits, a clutch of banks have sought relaxations in the guidelines for creation of the investment fluctuation reserve (IFR).

According to high-level bankers, IFR exemption has been sought for securities offered under the repurchase operations (repos) by the Reserve Bank of India.

Under the present RBI guidelines, banks are expected to provide a portion of their profits for the IFR. The RBI-prescribed IFR is 5 per cent of the value of the investment portfolio up to a maximum of 10 per cent. The deadline for reaching the IFR limit is March 2006, according to the original notification issued in 2002, though the RBI want banks to considerably advance the compliance dates.

The IFR was mandated in order to ensure that banks' losses by way of depreciation on investments, marked to the market, in the event of interest rates hardening was contained. Only investments falling in the "Held to Maturity" category are exempted from the IFR. These investments are about 25 per cent of the overall portfolio.

Banks' average investment deposit ratios are currently in the range of 45 per cent, exclusive of the repos securities. This would imply that on the incremental 20 per cent they would have to maintain the IFR.

Bankers said that all of them would be in a position to meet the 5 per cent deadline well before the prescribed date. In fact, most of them are in a position to meet the deadline this year itself. However, advanced compliance would also impact their distributable profits.

If the securities picked up through the repo auctions were included, the impact on the distributable profits would be substantial, bankers said. According to bankers, the Government, being the largest stakeholder in banks, would be the largest beneficiary of the distributable profits.

Besides, they are also keen to strengthen their Tier-I capital, instead of transferring large amounts to the IFR. This implies that banks are interested in transferring the surpluses more into general reserves, which is part of the high quality Tier-I capital.

The IFR is treated as only Tier-II capital despite it being a charge on the banks' surplus profits.This was because the RBI has taken the stand that it was more in the nature of a revaluation reserve. Bankers want this additional cushion in Tier-I capital to improve their capital to risk weighted asset ratio to meet the acceleration in credit growth. CD ratios for the banking sector during the last few weeks are in the region of about 57 per cent and expected to top the 60 per cent limit.

Strengthening this would also improve the book value of the bank shares, and with accompanying pricing advantages.

Further, bankers said that tax liabilities for all of them would be inclusive of the IFR. Pleas for extending tax exemption on this reserve have so far not been admitted by the CBDT.

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