The Hindu Business Line : RBI to review IFR norms after March 2006

THE Reserve Bank of India will review banks' `investment fluctuation reserve' requirement after the Basel-II rules come fully into force after March 31, 2006.

The central bank has said this in response to a query by Business Line on the relevance of IFR when, post Basel-II, any market risk in investment portfolio will be captured through capital allocation.

RBI has pointed out that banks should maintain capital for market risks on securities included in the `Held for Trading' category, open gold position, open forex position, trading positions in derivatives and derivatives entered into for hedging trading book exposures by March 31, 2005.

In addition, banks should maintain capital for market risks on securities included in the Available for Sale category also by March 31, 2006. Thus, banks would be required to maintain capital for market risks by March 31, 2006.

"The position relating to IFR would be taken up for review after March 31, 2006, by which time all banks will be complying with the guidelines on capital charge for market risks," the RBI's spokesperson, Ms Alpana Killawala, said.

This year, the RBI brought in some changes in the guidelines regarding securities that could be held under `available for sale' and `held for trade' categories.

Usually, banks are allowed to transfer securities from AFS and HFT heads to HTM only at the beginning of the year.

However, considering that most banks would be affected by rising interest rates (and therefore, falling bond prices), the RBI brought in two changes in its guidelines. First, it raised the limit for securities under HTM head from `25 per cent of investments' to `25 per cent of net demand and time liabilities'. Second, it allowed banks to effect the shift one more time this year.

Because of this, a few banks such as the Andhra Bank have ended up with much more amounts in the `investment fluctuation reserve', a reserve created to serve as a cushion against depreciation in the value of securities.

The RBI has clarified that any amount drawn from excess IFR would not be allowed to be distributed as dividends.

Any amount drawn down from the IFR "will remain as a `credit balance' in the `balance in profit and loss account' or may be appropriated to the Statutory Reserve, which would be eligible to be reckoned as Tier 1 capital."

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