Banks shore up IFR in FY04

Commercial banks were busy building investment fluctuation reserves (IFR) in fiscal year 2003-04 to withstand any shock arising out of a rise in interest rates.

According to an analysis of the financials of banks, 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. The IFR could act as a cushion in case of any interest rate risks.

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, if the rates go up, they will have to make provisions to mark-to-market their bond portfolio. Any rise in rates will have an impact on banks' bottomline.

Andhra Bank and Corporation Bank have already met the five per cent IFR level. The total amount held by Andhra Bank in the IFR as on March 2004 is 5 per cent against 2.50 per cent in the previous year.

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.

Union Bank of India has set an IFR of Rs 540 crore compared with Rs 314 crore in the same period last year. 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 that is 3.01 per cent is investment in gilts.