The RBI had given the freedom to banks to build up an investment fluctuation reserve (IFR) upto a maximum of 10 per cent of the portfolio depending on the size and composition of their portfolio, with the approval of their boards.
The RBI had earlier advised banks in January this year to build up an IFR of a minimum five per cent of the investment portfolio within a period of five years. This was done with a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments.
Said Development Credit Bank’s head-treasury, Harihar Krishnamoorthy: “It is sensible not to provide for IFR on the ‘Held to Maturity’ category since as per current regulations, this portfolio need not be marked-to-market and thus, be vulnerable to potential depreciation.”
Senior bankers are of the opinion that the upper limit of 10 per cent is not any ‘great shakes’ and any other figure could have been the limit. But the decision of not including investment under ‘Held to Maturity’ category for purposes of computation of IFR will enable banks to mark-to-market a less amount of their stock.
There is an increasing case for differentiation in IFR for banks who have booked profits and who have not booked profits. There are some banks, especially some of the public sector ones, which have been conservative in booking profits and have not sold much of their portfolio and are sitting on huge amounts of capital appreciation. The IFR, in present form, penalises both the kinds of banks — who have sold and those who have not sold their portfolios. The huge amounts of capital appreciation that some of these banks are sitting on would anyway be a buffer against an upward movement of interest rates which the IFR is intended to be.
Most banks are expected not to make a substantial provision this year since they would like to maintain their profits. They will put it off till the time that they can.
Individual stock held under the ‘Available for Sale’ category should be marked-to-market at least at quarterly intervals.