Summary of this article
RBI removes IFR requirement to support banks’ capital adequacy
Existing IFR balances to be reclassified as Tier 1 capital
Move aims to simplify norms and enhance regulatory clarity
The Reserve Bank on Wednesday decided to dispense with the Investment Fluctuation Reserve (IFR), an additional buffer which banks were required to maintain to hedge against depreciation in the value of investments, as a measure to support the capital adequacy of lenders.
Banks currently maintain IFR as an additional buffer against depreciation in the value of their investments, subject to mark-to-market (MTM) requirements.
Currently, commercial banks (including Local Area Banks, but excluding Small Finance Banks, Payment Banks and Regional Rural Banks) already maintain a capital charge for market risk and also follow revised norms on classification, valuation, and operation of investment portfolio.
In consideration of these applicable prudential requirements, it is proposed to dispense with the IFR requirement for such commercial banks, RBI said in its statement on Developmental and Regulatory Policies.
According to the draft directions issued in this regard, the RBI proposed that a bank shall treat the outstanding balance in the IFR as Tier 1 capital.
"For this purpose, the balance in the IFR shall be transferred 'below the line' to Statutory Reserve, General Reserve, or Balance of Profit & Loss Account," said the draft on which the RBI has invited comments by April 29, 2026.
The existing guidelines for other bank categories are also being revised to address the operational challenges encountered by such banks in complying with the regulatory thresholds on IFR and to harmonise instructions across bank categories, thereby enhancing regulatory clarity and consistency. Draft directions in this regard will be issued shortly for public consultation, it said.
Announcing the first bi-monthly monetary policy for the current fiscal, RBI Governor Sanjay Malhotra proposed to remove the condition regarding NPA provisioning for inclusion of quarterly profits in CRAR (Capital to Risk-weighted Assets Ratio) computation.
As per the extant guidelines, commercial banks (excluding Regional Rural Banks and Local Area Banks) are permitted to include quarterly net profits in the calculation of CRAR provided that the incremental provisions made for Non-Performing Assets (NPAs) at the end of any of the four quarters of the previous financial year, have not deviated more than 25 per cent of the average of the four quarters.
In a review, it is proposed to dispense with this condition. The draft amendment directions in this regard will be issued for public comments shortly, the Statement on Developmental and Regulatory Policies said.
