The Reserve Bank of India is toying with the idea of directing banks to create a special reserve as a cushion for any adverse movements in the value of their investment portfolios that may be triggered off by interest rate volatility. This reserve is to be funded from a small portion of their net profit every year. The issue came up for discussion with select bank chairmen last week.
Banks have been asked to furnish details of their statutory liquidity ratio (SLR) portfolio and the impact of a rate cut on their portfolios. Banks currently hold around 38 per cent of their total assets in SLR securities, as against the RBI stipulated minimum of 25 per cent.
If the price of a security instrument falls below the price at which banks bought it, they are required to make provisioning to make good the gap in prices. Conversely, if the prices rise higher than the acquisition price, banks can take the appreciation benefits on their books. The RBI's proposed investment reserve is intended to cushion the bank's balance sheets from such gyrations of the market.
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As an alternative, the RBI discussed the possibility of transferring the appreciation benefits to the special reserve, instead of letting it flow to the balance sheet first.
At present, 25 per cent of banks