The reason for this demand is that when a bank sets aside capital for market risk, it is also hedging against any adverse interest rate movement.
Hence, they do not want to make provision towards IFR as well as set aside capital for market risk i.e. banks feel that there is no need for two cushions for hedging against single risk - market risk.
Banks will be making provision for capital charge towards their held for trading (HFT) portfolio as on March 31, 2005 and towards their available for sale (AFS) portfolio as on March 31, 2006.
In the context of implementation of the system for provision of capital charge on market risks, there is a case for doing away with the concept of IFR, said HN Sinor, chief executive of the Indian Banks Association. Co-terminus with the doing away of IFR, the reserves should automatically be reckoned as Tier-I (core) capital, he added.
When we are moving towards enhancing our risk sensitivity by aligning our capital in sync with the underlying risk of our investment portfolio as per the Basel-II norm, I dont see any rationale in continuing with IFR. If IFR is persisted with, it will only increase the capital outlay said a senior treasury official with a state-owned bank.
Banks also pointed out that given the IFR built up by them so far, the net loss, if any, taken directly to stockholders equity, may be allowed to be set-off against the available IFR.
This is with a view to utilise IFR for the purpose for which it was created as also to help them contain the damage to Tier-I capital.
As per the RBI stipulation of 2002, banks are required to build an IFR of 5% of their total government securities holding by 2007. Most of the banks have already reached this milestone.
Some have even exceeded the 10% mark as the RBI allowed them to shift their gilts portfolio from the AFS category to the held to maturity (HTM) category as they got singed by the adverse movement in interest rates during the April to September 2004 period.