IFR gives banks room to up Tier-II

Banks' Tier-I capital adequacy will increase by 2 to 5 percentage points with the inclusion of investment fluctuation reserve (IFR) in their core capital.

The Reserve Bank of India's (RBI) move to let banks treat IFR as Tier-I capital led to share prices of banks, particularly public sector banks, to rise sharply today. NSE's Bank Nifty index closed up 2.71 per cent at 4,489.40 points.

Dena Bank will be an exception as the gain in capital adequacy for it will be just 22 basis points, as it had an IFR of just Rs 42 crore as on March 31, 2005, analysts said.

The transfer of IFR to Tier-I will provide banks room to increase their Tier-II capital by twice the amount of IFR. Tier-I capital includes equity and reserves, while Tier-II comprises subordinated debt and revaluation reserves.

Partho Mukherjee, senior vice-president (treasury), UTI Bank, said, "This is a positive step. It has been a long-term demand to provide for additional Tier-I capital. How long this additional room will benefit a bank is difficult to quantify. It is a function of its growth and profitability."

Public sector banks were the biggest gainers on the stock exchange. Bank of India shares rose by 6.15 per cent to Rs 126.05, the highest gain among government-owned banks. SBI shares rose by 3.81 per cent to Rs 937.90 and Oriental Bank of Commerce shares jumped by 4.40 per cent to Rs 292.90.

"Tier I capital is always superior. This move is very beneficial for banks as any additional Tier-I capital will give more room to raise tier II capital. Public sector banks will gain more as they are constrained by the 51 per cent floor on the government's stake," said IDBI Bank's CEO of commercial banking SBU, G V Nageswara Rao.
 

CAPITAL GAINS
Capital as on Mar 31, 2005	(in Rs cr)		(in %)  Capital Adequacy
	Tier-I Cap.	IFR
State Bank of India	24,072.13	5,253.89	12.45
ICICI Bank	10,246.32	516.00	11.78
HDFC Bank	3,962.16	484.19	12.61
UTI Bank	2,110.96	292.81	12.66
Oriental Bank	2,676.80	705.50	9.21
Union Bank of India	3,614.43	555.00	12.09
Dena Bank	1,103.74	42.69	11.91
Corporation Bank	3,054.92	444.00	16.23
Bank of India	4,464.87	321.76	11.52
Bank of Baroda	5,851.03	1,042.54	12.61
Indian Bank	5,936.36	556.99	14.14