IFRs may ease rate rise impact on banks

Rising bond rates may not have a devastating impact on the bottomlines of commercial banks.

According to banking sector analysts, most of the banks have built a cushion in the form of investment fluctuation reserves (IFRs) to withstand any shock arising out of a rise in interest rates.

On an average, banks have built up an IFR of around 3.5 per cent of their investments in government securities.

The Reserve Bank of India (RBI) in 2001 had directed banks to build a 5 per cent IFR by March 2006.

Sources close to the RBI pointed out that there will not be any drastic impact on banks' balance sheets.

"There could be some minor impact, depending on a particular bank's bond portfolio. But in no way it will be alarming," said sources.

The banks have made huge profits in their government securities portfolio over the last few years as interest rates dipped.

The yield on the 10-year benchmark government paper has dipped by over 6 percentage points since 2000. As the prices of bonds move in an inverse ratio to the yield, banks make profits when interest rates dip.

However, as the rates are moving northwards, they will be required to make provisions to mark-to-market their bond portfolio. This will in turn impact their bottomlines.

Andhra Bank and Corporation Bank have already met the five per cent IFR level.

Vijaya Bank and Bank of Baroda have maintained an IFR of around 4 per cent of securities under held for trading and available for sale.

Canara Bank has built up reserves of Rs 978 crore up to March 2004, reaching 3.5 per cent of its total investments in gilts.

Allahabad Bank's IFR as on March 31, 2004, accounts for 3 per cent of its investment in gilts.

UCO Bank holds Rs 329.61 crore (Rs 126.61 crore) in the IFR of which 3.01 per cent is invested in gilts.