Banks can't use IFR to set off treasury losses

The Reserve Bank of India (RBI) is unlikely to allow commercial banks to use the investment fluctuation reserve (IFR) for setting off treasury losses while preparing the profit and loss (P&L) account for 2004-05.

According to banking sources, the RBI may consider offering this facility in the new fiscal year on a case-to-case basis, if interest rate fluctuations are too wide. A case-to-case basis approach will be necessary as each bank has its own way of maintaining the IFR.

Ahead of the mid-term policy review in last October, banks had made a presentation to the RBI seeking the regulator's nod to use the IFR while drawing the P&L account.

IFR is a reserve which banks build over the recent years drawing down from their treasury profit, which soared on account of falling interest rates. The objective is to use this as a cushion against any rise in interest rates.

According to bankers, the reserve is maintained as a provision against market risk. Therefore, they should be allowed to use it for setting off their losses before arriving at the net profit.

As per the existing norms of the RBI, banks across the board are required to build up the IFR of a minimum of 5 per cent of the investment held in the trading portfolio within five years from the year March 31, 2002.

As per the current norms, the provisioning towards interest rate risk from the IFR could be done as an off-balance sheet measure after arriving at the profit and loss figure. Senior bankers said the very purpose to avoid a loss will not be met if IFR is used as off-balance sheet provisioning.

Sources said the RBI feels that interest rates will be stable for some time and fluctuations will be less frequent.

Moreover, most banks have already shifted government securities in the trading portfolio maintained as part of the mandatory statutory liquidity ratio (SLR) requirement into the non-trading category (held to maturity).

While transferring it "" in the second and third quarters of the current fiscal "" the banks have taken a hit. The banks made the representation to the RBI to avoid depreciation losses in their investment portfolio before the second quarter was over.

Banks' portfolio of investments witnessed an erosion in market value with the sharp rise in rates in government securities the second quarter ended September 30.

The 10-year benchmark is currently hovering at 6.65 per cent, up by 150 basis points compared with 5.15 per cent during March 31, 2004.