Saturday, May 5, 2018

Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks – Spreading of MTM losses and creation of Investment Fluctuation Reserve (IFR)


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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 may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.
Banks choosing the above option shall make suitable disclosures in their notes to accounts/ quarterly results providing details of
·        the provisions for depreciation made during the quarter/year and
·        the balance required to be made in the remaining quarters.
All banks are advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19, as under:
An amount not less than the lower of the following:
·        net profit on sale of investments during the year
·        net profit for the year less mandatory appropriations
shall be transferred to the IFR, until the amount is at least 2 % of the HFT and AFS portfolio, on a continuing basis. This should be achieved within a period of 3 years where feasable.
A bank may, at its discretion, draw down the balance available in IFR in excess of 2 %, for credit to the balance of profit/loss at the end of any accounting year. Where the balance in the IFR is less than 2 %, a draw down will be permitted subject to the following conditions:
·        The drawn down amount is used only for meeting the minimum CET1/Tier 1 capital requirements by way of appropriation to free reserves or reducing the balance of loss, and
·        The amount drawn down is not more than the extent, the MTM provisions made during the aforesaid year exceed the net profit on sale of investments during that year.
IFR shall be eligible for inclusion in Tier 2 capital.
Based on RBI notification dated 2nd April 2018. For any further clarification, please visit www.rbi.org.in ...............Poppy

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