The Hindu Business Line : A third of bank profits appropriated to IFR

PUBLIC sector banks have appropriated about a third of the profits that they made during the year 2001-02 towards the Investment Fluctuation Reserve (IFR) account.

Twenty-four banks transferred Rs 1,628 crore to this account out of the profits of Rs 5,675 crore that they made during the last year. Three of these 24 banks — United Bank of India, Indian Bank and Dena Bank did not create an Investment Fluctuation Reserve in view of their weak financial position.

The Reserve Bank of India had asked banks to transfer the maximum amount of gains realised on sale of securities to their Investment Fluctuation Reserve earlier this year. This was a reiteration of the caution voiced in the October 2001 Credit Policy which called for greater prudence in the matter, when it began to be clear that banks were putting more money in investments than credit. It was also becoming apparent that in view of falling interest rates, banks would make a killing on their investment portfolios. The RBI's move was aimed at ensuring that banks did not fritter away these gains but used it to provide themselves a cushion against a possible reversal in the interest rate scenario.

Although most banks have marked to market their investment portfolio, the RBI had decided that building up such a cushion would ensure that their bottom-line would be protected from undue volatility.

The RBI had said that the objective for the banks should be to achieve an Investment Fluctuation Reserve of a minimum of 5 per cent of their investment portfolio within 5 years. Banks were of course free to build up a higher percentage of reserves subject to their board's concurrence.

A quick look at the current picture for these 24 banks reveal that their investment fluctuation reserve, which currently stands at around Rs 2,412 crore constitutes a little over 1 per cent of their investment portfolio as of March 31st 2002.

Attaining the 5 per cent target is going to take some doing — especially because the windfall that happened last year is not likely to continue this year.

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