Date:13/05/2005 URL: http://www.thehindubusinessline.com/2005/05/13/stories/2005051301400600.htm

Back Risk-averse, most banks reach IFR limit

C. Shivkumar

Bangalore , May 12

MOST banks have reached the investment fluctuation reserve (IFR) limit ahead of the deadline prescribed by the Reserve Bank of India, i.e. April 2006.

According to RBI guidelines, banks are expected to have built-up reserve of 5 per cent of the investment portfolio within the prescribed deadline. The IFR would include only securities falling in the Available for Sale and Held for Trading categories. It is created as a "below the line'' funded reserve implying appropriation from net profits.

For the last financial year, some banks had shown that the IFR compliance was only slightly upwards of 4 per cent.

But most of them reached the deadline within a month after closing the accounts for the last financial year. They said that the compliance was achieved largely through derisking of their respective investment books, by reducing the maturity of their portfolios.

Bankers said the average maturity of their respective investments in both the HFT and the AFS categories were under 2.5 years for the public sector. Inclusive of the Held to Maturity (HTM), the maturity varied between 3.5 and 4 years. In the case of the private sector banks, the average maturity of their investment books was under one year . Inclusive of the HTM categories, average tenor of private sector banks' bond portfolios was barely 2 years, (the sources said.

The introduction of the 182-day T-Bill and the market stabilisation scheme had helped banks . T-Bill investments limited interest rate risks substantially.

Bankers said this kind of investment strategy allowed them to remain liquid, particularly at a time when credit offtake was expected to remain buoyant.

But with the investment books derisked, it would also allow most of them to shift seamlessly to the capital charge mechanism prescribed by Basel-II by 2007.

They expect that the IFR at this point would become part of Tier-I capital instead of Tier-II capital up to 5 per cent as it is currently treated.

However, bankers said this kind of portfolio derisking had resulted in a steep increase in spreads between T-Bills and dated securities. In fact, most banks were sellers in dated securities leading to a hardening of yields.