Our Bureau

Mumbai , Oct. 10

IN a bid to help banks to meet capital adequacy as per Basel II norms, the Reserve Bank of India has allowed them to treat the entire balance of securities in their investment fluctuation accounts (IFR) as Tier-I capital.

So far, banks were allowed to treat only balance in excess of five per cent in respect of securities available for sale (AFS) and held for trading (HFT) in IFR as Tier-I capital.

In April 2005, banks which had maintained capital of at least nine per cent of the risk weighted assets for both credit risk and market risks for HFT and AFS categories, were allowed to treat the balance in excess of five per cent of securities included under HFT and AFS categories, in the IFR, as Tier-I capital. Banks satisfying the above were allowed to transfer the amount in excess of the said five per cent in the IFR to Statutory Reserve.

In a notification issued to banks, the RBI on Monday said, "It has now been decided that banks which have maintained capital of at least nine per cent of the risk weighted assets for both credit risk and market risks for both HFT and AFS category as on March 31, 2006, would be permitted to treat the entire balance in the IFR as Tier-I capital. For this purpose, banks may transfer the balance in the Investment Fluctuation Reserve `below the line' in the Profit and Loss Appropriation Account to Statutory Reserve, General Reserve or balance of Profit & Loss Account."

In the event, provisions created on account of depreciation in the `Available for Sale' or `Held for Trading' categories are found to be in excess of the required amount in any year, the excess should be credited to the Profit and Loss account, and an equivalent amount should be appropriated to an Investment Reserve Account would be eligible for inclusion under Tier-II within the overall ceiling of 1.25 per cent of the total Risk Weighted Assets prescribed for General Provisions/Loss Reserves.

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