RBI Scraps IFR Buffer For Banks

Mumbai: The Reserve Bank of India (RBI) on Wednesday proposed to relax capital computation norms for banks, removing a key NPA-linked condition for including quarterly profits in capital adequacy calculations, while also proposing to do away with the Investment Fluctuation Reserve (IFR).

According to RBI Governor Sanjay Malhotra, changes in investments, such as movements in bond yields, which can rise or fall, have implications for banks’ profitability.

“Banks then approach us seeking permission to stagger these losses. So, the concept of IFR was introduced to partly mitigate such volatility. However, the view now is that market prices, reflected through mark-to-market valuation, should be fully factored in as they present the true financial position of banks. Accordingly, if investments are valued in line with market prices, the need for a separate fluctuation reserve diminishes," he said.

Separately, RBI also announced simplifying regulatory guidance that will enable bank boards to have a sharper focus on strategic priorities, further strengthening their risk and governance capabilities.

On the supervision side, the RBI has further consolidated 64 Master Directions in nine functional areas thus reducing the compliance cost for banks. On the payment system side, the central bank proposed to dispense with the requirement of due diligence of MSMEs while onboarding on TReDS platforms. This measure is expected to further increase trading volumes on platform and offer liquidity to the sector. Banks and regulators would however need to identify risks inherent proactively on this front.

The IFR was an additional reserve under Tier 2 capital to cover the losses on non-Held to maturity (HTM) investment book. With banks already covering these losses under capital charge for market risk and other income recognition provisions, IFR was a duplication in some sense. "The proposal irons out this and makes risk recognition more transparent and simpler. Also, basis some rough back of the envelop calculations, Indian Commercial Banks can see the IFR corpus of around 35-40,000 crore getting freed up through reversal," said SBI Economic Research in a report.

On the market development side, participant base of the term money market is proposed to be expanded to include non-bank participants viz., All India Financial Institutions, NBFCs, Housing Finance Companies with enhanced limits for specified primary dealers.