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IFR leeway to see banks rush for tier-II capital

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Our Banking Bureau Mumbai
Last Updated : Feb 06 2013 | 8:52 AM IST
The debt market may see a string of subordinated issues from banks to raise tier-II capital as the Reserve Bank of India has allowed banks to consider investment fluctuation reserve (IFR), maintained over and above 5 per cent, as tier-I capital.
 
In a circular issued on April 30, the RBI stated, "With a view to encourage banks for early compliance with the guidelines for maintenance of capital charge for market risks, it has been decided that banks may treat the balance IFR in excess of 5 per cent of securities included under held for trading (HFT) and available for sale (AFS) categories, in the IFR, as Tier I capital."
 
With this, banks will be encouraged to provide more for IFR as they could transfer the excess to tier-I. "Since a bank can raise tier-II capital to the extent of 50 per cent of its tier-I capital, this will give a major boost to banks to raise capital at a crucial; time when they have to get ready for the Basle-II norms by March 31, 2006," said Partha Mukherjee, head treasury, UTI Bank.
 
In a bank balancesheet, reserves, surplus and share capital comprise tier-I capital, whereas subordinated debt is referred to as tier-II capital. HFT and AFS)are categories where banks maintain their securities for trading whereas securities maintained under "held to maturity" is not traded.
 
In order to assess the risk arising out of the fluctuation in interest rate in the market, value of these securities are assessed on a daily basis. In case there is huge depreciation in value owing to market fluctuation, RBI has directed banks to provide for such fluctuation under investment fluctuation reserve.
 
Under the new norms for Basle-II, banks have to maintain capital charge on the market risk on all trading positions including gold, foreign exchange and derivatives , government securities which will require more capital.
 
During the second quarter in the last fiscal that witnessed yield on the 10-year benchmark government paper shooting up to 6.22 per cent on September 30, 40 basis points higher than the closing yield on June 30 (5.82 per cent), the RBI had given a one-time permission to banks to transfer securities from trading accounts (HFT and AFS) to non-trading category (HTM).
 
While this has reduced the base of total tradable securities post transfer, the IFR maintained in percentage terms, consequently went up. To be precise, if IFR used to be 3 per cent of the portfolio earlier, it went up to over 5 per cent after the transfer of the securities.
 
In fact, for some banks which used to aggressively provide for IFR, the percentage has gone up to around 12-13 per cent.

 
 

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First Published: May 02 2005 | 12:00 AM IST

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