The Telegraph
Since 1st March, 1999
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Banks want investment buffer boosted

Calcutta, Aug. 24: Public sector banks have sought Reserve Bank of India’s (RBI) permission for a hike in the limits on the investment fluctuation reserve (IFR) at a time when they are counting on their treasury operations more than ever before for a boost in income.

Banks had been advised by the RBI to maintain a minimum IFR of at least 5 per cent of their investment portfolio over a five-year period and a maximum of 10 per cent.

Public sector banks want the IFR to be raised to expand their capital base, but their plea for these funds to be recognised as part of Tier One capital has been spiked by the Reserve Bank. It will be a component of Tier Two capital since the RBI treats gains from securities appreciation as revaluation reserves.

Treasury operations have contributed heavily to banks’ profits over the past few years and officials say it will account for 50 per cent of the net profit made by top banks this year if their predictions of a sustained surge ring true.

They are, therefore, willing to shovel a larger proportion of gains arising from investments into the reserve.

This, in turn, will boost capital adequacy ratios, especially those of weak banks, and put them in a position where they need not ramp up Tier One capital through equity flotations immediately, officials said.

Banks are hesitant to raise resources through equity due to pricing problems. They point to the low prices that even strong public sector banks like Punjab National Bank had to live with in their maiden offers.

Sources said not all banks were prepared to risk a low pricing, as it would leave their equity bases bloated and, as a consequence, drag down earnings per share.

At the same time, banks also want to retain more resources needed for the increase in capitalisation that typically accompanies stepped-up credit disbursals.

Currently, most banks are operating at credit deposit ratios of around 48 per cent and an average capital adequacy ratio of 10.5 per cent.

A rise in these ratios has to be backed by larger capitalisation, officials said.

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