Banks Told To Shift Max Gains To Ifr

The Reserve Bank of India (RBI) said today that banks should transfer maximum amount of the gains realised on sale of investments in securities to the Investment Fluctuation Reserve Account (IFRA).

It also asked the banks to ensure that the unrealised gains on the investments are not taken to the income account or to the IFRA.

The objective of the transfer of gains realised on the sale of investments should be to achieve IFRA of a minimum of 5 per cent of the portfolio within a period of 5 years.

The central bank said the banks were, however, free to build up higher percentage of IFRA of up to 10 per cent of the portfolio depending on the size and composition of their portfolio, with the concurrence of their boards.

 

Individual scrips held under the 'available for sale' category should be marked to market, at least at quarterly intervals, it added.

The IFRA, comprising realised gains from sale of investments, would be eligible for inclusion in Tier-II capital as hitherto. The central bank has advised the banks to assess the impact of changes in interest rates on their investment portfolio.

They have been asked to fix a definite timeframe for moving over to Value-at-Risk and Duration models for measuring interest-rate risk. Banks may initiate appropriate steps in this direction, it added.

The apex bank has permitted the banks to transfer balances from IFRA to 'profit and loss account' to meet the depreciation requirement on investment as a below-the-line item would continue, as hitherto.

In its credit policy for 2001-2002, the central bank had cautioned the banks on the need for following a more prudent policy for utilising the gains realised on sale of investments in securities. These gains arose from the decline in interest rates and for building up adequate reserves to guard against any possible reversal of the interest rate environment in future due to unexpected developments.