The Reserve Bank of India (RBI) has issued final amendment directions easing the Investment Fluctuation Reserve (IFR) maintenance framework for Urban Co-operative Banks (UCBs) and Rural Co-operative Banks (RCBs), formalising relaxation measures that had earlier been proposed in draft form.
Through separate amendment directions issued on Monday, the RBI revised the IFR requirements under the investment portfolio norms applicable to co-operative banks. The amendments are aimed at addressing practical difficulties faced by banks in maintaining the reserve under the earlier framework.
The central bank stated that the changes were necessitated due to “certain operational constraints” being experienced by co-operative banks while complying with the existing IFR maintenance instructions.
Under the revised norms, Rural Co-operative Banks will now be required to maintain IFR of not less than 5 per cent of investments classified under the “Current Category”. The RBI has clarified that the minimum requirement will be assessed annually with reference to the book value of investments as on the balance sheet date, instead of requiring ongoing calculations during the year.
Similarly, Urban Co-operative Banks will maintain a minimum IFR of 5 percent of investments classified under the Held for Trading (HFT) and Available for Sale (AFS) categories. The requirement will also be assessed annually on the basis of the book value of investments as on the balance sheet date.
Importantly, the RBI has provided additional flexibility to UCBs by permitting them to utilise IFR balances maintained in excess of the mandatory 5 per cent threshold. Under the amendment, banks may transfer the excess amount to the Profit and Loss Account at the end of an accounting year.
The amendment directions have been issued under the Banking Regulation Act, 1949, and have come into force with immediate effect.
The move is expected to provide operational relief and greater balance sheet flexibility to co-operative banks while retaining the minimum prudential buffer intended to absorb valuation risks arising from fluctuations in investment portfolios.
