RBI proposes scrapping IFR, allows quarterly profit inclusion in CRAR

Mumbai, Apr 8, 2026

Banks could see Rs 35,000 - Rs 40,000 crore freed up of IFR corpus through reversal

The Reserve Bank of India (RBI) on Wednesday eased key rules that are expected to have a positive impact on banks’ capital ratios. The central bank proposed to do away with the investment fluctuation reserve (IFR) requirement for commercial banks, and also allowed banks to include quarterly profits in capital to risk-weighted assets ratio (CRAR) calculations irrespective of fluctuations in provisioning levels.

Under current guidelines, commercial banks can include quarterly net profits in CRAR only if provisioning for non-performing assets (NPAs) does not deviate by more than 25 per cent from the four-quarter average — a condition the RBI has now proposed to remove. The central bank has also proposed to dispense with the Investment Fluctuation Reserve (IFR), as most commercial banks already maintain capital for market risk and follow updated norms for investment classification and valuation.

“The NPA-related change will mainly help in smoothing (out) CRAR over the year. Earlier, banks were not allowed to include quarterly profits in CRAR; this could only be done at the end of the financial year. Now, with the change, profits earned in each quarter can be included in CRAR as they accrue. That said, in overall terms, the end result remains the same, so there is no material difference on a full-year basis”, said a senior banker at a state-owned lender, adding that the IFR change, however, is more significant.

“Most banks maintain around 2 per cent or so in IFR, which will now no longer be required. It remains unclear how this will be treated — whether it will be transferred to profits or handled in some other manner — and further clarity is awaited,” he said.

Through the reversal, banks could free up an IFR corpus of around Rs 35,000-40,000, according to an SBI Research report. Banks can use this corpus optimally and judiciously between Common Equity Tier 1 (CET-1) capital and profit & loss account, even when yields have moved up substantially during the previous quarter, the report added.

According to Suresh Ganapathy, head of Financial Services Research, Macquarie Capital, the IFR requirement being done away with, in case banks fully reverse it, will be around 20-30 bps for most banks. “However, we believe banks are unlikely to reverse and may stop making incremental IFR every year. Banks anyway today have excess capital,” he said, adding that the other measure is merely a reporting change for quarterly CAR (capital adequacy ratio) reporting with respect to accounting for NPA provisions and doesn't change the full year CAR number for banks.

IFR is a buffer that banks maintain to protect against potential losses arising from fluctuations in the value of their investment portfolios, particularly due to mark-to-market (MTM) movements when interest rates change. Banks set aside a portion of their profits into this reserve, which can be used to absorb losses when bond prices fall, thereby ironing out the impact on earnings.

According to RBI Governor Sanjay Malhotra, changes in investments, such as movements in bond yields, which can rise or fall, have implications for banks’ profitability. “Banks then approach us seeking permission to stagger these losses. So, the concept of IFR was introduced to partly mitigate such volatility. However, the view now is that market prices, reflected through mark-to-market valuation, should be fully factored in as they present the true financial position of banks. Accordingly, if investments are valued in line with market prices, the need for a separate fluctuation reserve diminishes”, he said.

RBI Deputy Governor Swaminathan J explained that IFR has had a somewhat checkered history. It was introduced in a particular context, then withdrawn, to be reintroduced later. There was also a lack of uniformity across bank types, with different guidelines applicable to different lenders. “IFR is considered no longer relevant. Its removal is, therefore, aimed at simplification. Additionally, there were varying levels of compliance across banks, leading to supervisory observations. By dispensing with the requirement, the framework becomes easier to implement and more consistent,” he said.

According to Anil Gupta, senior VP & co-group head Financial Sector Ratings, ICRA, the proposal to remove IFR requirements will result in some improvement in reported Tier I ratios of the banks, since it is currently included in lenders’ Tier II capital. “Given the strong capital ratios for most of the banks, the increase in Tier I capital ratio will not have a material positive impact on the overall capital ratios. We expect this change to have a positive impact of 6-12 bps (basis points) on Tier I capital ratio of banks”, he said.

Change allows profits earned in each quarter to be included in CRAR as they accrue; doesn’t change on full-year basis

IFR is a buffer that banks maintain to protect against potential losses arising from fluctuations in the value of their investment portfolios

IFR is considered no longer relevant. Its removal is, therefore, aimed at simplification: RBI Deputy Governor

[The Business Standard]