RBI Amends Directions on IFR for Various Bank Categories

Current Context: On May 18, 2026, the Reserve Bank of India (RBI) amended its directions on the Investment Fluctuation Reserve (IFR) across multiple categories of banks.

• The changes reflect a shift toward a more risk-sensitive prudential framework, reducing duplication of buffers and easing operational challenges, while simultaneously strengthening capital adequacy.

Highlights

• Commercial Banks: IFR requirement abolished; balances as of May 17, 2026, can be moved to statutory/general reserves or P&L, and recognised as CET1 capital.
• Urban Co-operative Banks: Must maintain IFR = 5% of HFT+AFS portfolio annually; excess above 5% may be drawn into P&L with Board approval.
• Small Finance Banks: IFR waived for those maintaining capital charge for market risk; others comply annually, with transfers only from net profit after mandatory appropriations.
• Payments Banks: Required to build IFR = 2% of portfolio, funded from realised gains and net profit transfers; assessed once a year.
• Regional Rural Banks: IFR compliance shifted to balance sheet dates, harmonising rules and reducing rigidity.
• Overall Impact: Enhances capital strength, aligns with international standards, and simplifies compliance for smaller institutions, ensuring resilience without unnecessary operational burden.

Question:

Q.1 Under the revised RBI norms, Urban Co-operative Banks must maintain IFR equivalent to what percentage of their HFT and AFS portfolio?
a) 2%
b) 3%
c) 5%
d) 10%

Answer: c) Urban Co-operative Banks are required to maintain IFR equal to 5% of their Held for Trading (HFT) and Available for Sale (AFS) portfolio annually.