The Hindu Business Line : Banks allowed to treat part of IFR as Tier-I capital

THERE'S good news for bankers! The Reserve Bank of India has acceded to their request of allowing them to treat a portion of the Investment Fluctuation Reserve (IFR) as part of their Tier-I capital.

In a circular to commercial banks, RBI has said banks that have maintained capital of at least nine per cent of the risk weighted assets for credit and market risks for both HFT (held for trade) and AFS (available for sale) category may treat the balance in excess of five per cent of securities included under HFT and AFS categories, in the IFR, as Tier-I capital.

Banks satisfying the criteria may transfer the amount in excess of the said five per cent in the IFR to statutory reserve. This transfer shall be made as a `below the line' item in the Profit and Loss Appropriation Account.

A couple of years ago, as a means to provide a cushion against interest rate risk, the RBI had asked banks to build up an IFR of up to five per cent of the total trading and AFS portfolios.

Recently, a number of banks shifted a huge portion of their securities from their portfolio to the held to maturity category. As a result, the IFRs of many banks have shot up to substantially above five per cent.

On the other hand, to ensure smooth transition to Basel II norms banks were advised to maintain capital charge for market risk in a phased manner over a two-year period, in respect of securities included in the HFT and AFS categories by March 31, 2006.

Bankers had made several representations to the RBI in the recent past, to allow them to transfer the excess IFR to the Statutory Reserve, as they were already providing capital charge for market risk, in addition to meeting the IFR requirements.

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