MUMBAI: The Reserve Bank of India (RBI) has asked the banks to build up an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19 to protect against the valuation losses in securities portfolio following increase in yields in the future.
RBI said the IFR will qualify for Tier 2 capital of the bank. RBI has also allowed the banks to spread out the mark-to-market (MTM) provisioning against losses in its investments in the available for sale (AFS) and held for trading (HFT) portfolios in the coming two quarters.
Currently, the banks are required to mark to market (MTM) the individual scrips in available for sale (AFS) at quarterly/more frequent intervals and held for trading (HFT) at monthly/more frequent intervals and provide for net depreciation, if any.
With a view to addressing the systemic impact of sharp increase in the yields on Government Securities, it has been decided to grant banks the option to spread provisioning for mark to market (MTM) losses on investments held in AFS and HFT for the quarters ended December 31, 2017 and March 31, 2018.
The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.
However, the banks that utilise the option have to make suitable disclosures in their notes to their financials  providing details of the provisions for depreciation of the investment portfolio for the quarters ending December 2017 and March 2018 made during the quarter/year, and the balance is required to be made in the remaining quarters.
An amount not less than the lower between – the net profit on sale of investments during the year and the net profit for the year less mandatory appropriations – should be transferred to the IFR until the amount of IFR is at least two per cent of the HFT and AFS portfolio, on a continuing basis. Banks are advised to achieve the size within a period of 3 years, if possible
The banks will have the freedom to draw down the balance available in IFR in excess of two per cent of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year.
Though the statutory liquid ratio (SLR) requirements seek the banks to keep only a minimum of 19.5 per cent of their net demand and time liabilities (NDTL) in government securities or equally rated instruments, they end up investing much more than that at times depending on the behavior of the credit market.
And this has determined more often than not, the banks’ bottom line – with the portfolio looking good when the yields drop and vice versa.
The international factors like US Federal Reserve’s stand, the domestic issues including the government debt, inflation, etc. can have their influence on the yields of government securities. While the held to maturity (HTM) portfolio doesn’t call for mark to market, the other two portfolios – available for sale (AFS) and held for trading (HFT) undergo marking to market at stipulated intervals.
