IFR Removal and Quarterly Profit in CRAR: RBI Proposals
Why in the news
The RBI put forward two changes meant to simplify capital reporting and unlock idle funds, nudging banks toward a more current view of their financial strength.
The two proposals
| Aspect | IFR | Quarterly profit in CRAR |
|---|---|---|
| Existing position | Compulsory buffer built from profits to absorb losses when bond prices drop (market risk) | Quarterly profit counted only if NPA provisioning stayed within 25% of the average; otherwise wait for year-end |
| Proposal | Do away with the requirement | Count quarterly net profit irrespective of provisioning fluctuations |
| Reasoning | Banks already hold capital for market risk under modern international norms and revised investment classification rules | Smooths capital ratios through the year; year-end total unchanged |
| Impact | About ₹35,000-40,000 crore freed; usable for Tier-1 capital or transfer to the P&L | Fresh, more accurate capital strength every three months |
Background concepts
- CRAR: Capital to Risk-Weighted Assets Ratio, the main yardstick of a bank’s financial strength.
- Mark-to-Market (MTM): when interest rates rise, existing bond values fall and the loss is recorded straight away; the IFR served as a rainy-day fund for that.
- CET-1 capital: top-quality capital, mostly common stock and retained earnings, the first line of defence because it absorbs losses without halting business.
Exam angle
- Reserve proposed for removal: IFR; amount released: ₹35,000-40,000 crore.
- Old condition removed: the 25% provisioning deviation test.
- Both changes were proposals by the RBI, aimed at a real-time view of bank health.