UCBs told to set up investment fluctuation reserve

 This directive has been issued so that these banks adequately hedge themselves against any adverse movements in interest rates.

 UCBs should build up IFR out of realised gains on sale of investments, subject to availability of net profit. For the smaller UCBs, however, IFR build up is optional.

 The minimum IFR requirement of five per cent is to be computed with reference to investments in two categories - held for trading (HFT) and available for sale (AFS) category.

 Investments under the held to maturity category, however, are not to be reckoned for the purpose.

 The IFR, so built-up, will be eligible for inclusion of Tier-II capital. Banks may utilise the amount held in IFR to meet, in future, the depreciation requirement on investment in securities, as per the guidelines issued by the central bank.

 The UCBs have been given the freedom to build up a higher percentage of IFR, up to 10 per cent of their investment portfolio, with the approval of their board of directors.

 Banks should transfer maximum amount of the gains realised on sale of investment in securities to the IFR.

 Transfer to the IFR is to be as an appropriation of net profit after appropriation to the Statutory Reserve.

 Transfer from the IFR to the profit & loss account to meet depreciation requirement on investments will be a