IFR norms review likely

The Reserve Bank of India (RBI) is likely to review investment fluctuation reserve (IFR) norms for commercial banks.

According to banking sources, Mint Road may hike the IFR limit beyond the current 5 per cent of the total investment portfolio. This is because market fluctuations have been too wide and the limit of 5 per cent is considered too less for a provisioning measure.

Some public sector banks have already reached the 5 per cent limit. The average IFR of banking system is around 3 per cent. A dealer said the 5 per cent IFR for the entire year is way too low for provisioning at a time when yields on government securities have bee rising by 2-3 basis points on an weekly basis.

Sources also added that a final decision will be taken after taking into account the impact of capital charge on market risk of the portfolio.

As per the Basel-II norms, every bank will have to set aside capital for the price risk the investment portfolio carries for valuation purposes.

Therefore, banking sources said, the review will have to be made in consonance with the Basel norms.

The banking sector is set to witness an erosion of Rs 4,500-4,800 crore in value of the government securities held for trading for the second quarter ended September 30.

This is after the RBI allowed banks to set aside their SLR securities into the held-to-maturity category, which is not a mark to market category for valuation purposes.

Explaining the scenario in the second quarter, dealers said till recently, the banking sector has holding about Rs 5,00,000 crore worth of gilts under the 'available for sale' and 'available for trading' categories.

They need to mark to market these two portfolios. Following the relaxations of investment norms by the RBI, banks have transferred a chunk of securities to the 'held to maturity' category which does not need to be marked to market.

By a round estimate, around Rs 3,00,000 crore worth of gilts are now held for trading and they need to be marked to market.

According to dealers, with every one basis point rise in yields there is an erosion in the value to the extent of 4 paise. Assuming that the Rs 3,00,000 crore gilts under trading portfolio has an average maturity of four years, the loss will be to the tune of around Rs 4,800 crore considering the yield has gone up by 40 basis points.