There seems to be consensus between commercial banks and the Reserve Bank of India over the use of investment fluctuation reserve for setting off depreciation losses incurred in their investment portfolio on account of falling bond prices.

The mid-year review of the annual policy of the central bank is likely to take a view that banks could use the surplus reserves maintained as IFR in excess of 5 per cent limit for setting off depreciation losses in their investment portfolio.

This is after finalising the profit and loss account. In other words, the provisioning will not affect the profitability of the banks.

This will not disturb the prescribed 5 per cent limit of IFR maintenance and at the same time there will not be any disparity in accounting principles, which otherwise, would have occurred had banks been allowed to use IFR before finalising the P&L account.

Going by the extant norms, the banks are required to build IFR to the extent of 5 per cent of their investment portfolio and any use of this pile is required to be done above the line -- that is before finalising the P&L account.

After shifting most bulk of the SLR bonds to the held to maturity category, the corpus of the securities available for trading and sale has shrunk in size and, consequently, the IFR maintained till date in proportion to the trading portfolio has shot up.

For instance, if the IFR was 3 per cent of the trading portfolio of a bank earlier, it has gone up over 5 per cent after the transfer of the securities. In fact, for some banks, which had aggressively provided for IFR, the percentage may have gone up to as much as over 10 per cent.

While the HTM category is immune to interest rate fluctuations, the trading portfolio of banks comprise securities "available for sale" and "held for sale" categories. Banks need to mark to market these portfolios in accordance with the market prices of bonds.

The proposal is a fallout of the representation made by the banks to avoid depreciation of losses in their investment portfolio before the second quarter was over.

Banks' portfolio of investments witnessed a erosion in market value with the sharp rise in interest rates in government securities in the second quarter ended September 30.

The yield on the 10-year benchmark government paper was 6.22 per cent on September 30, 40 basis points higher than the closing yield on June 30 (5.82 per cent).

The RBI recently allowed the banks to transfer government securities maintained under SLR to held to the HTM category of portfolio. However, the transfer could be done only at a cost, which is least among the holding cost, acquisition cost and market price.