Here’s a quiz question: How can banks offset hypothetical Treasury losses in a rising rate cycle? The answer lies in an under-utilized instrument called the Investment Fluctuation Reserve, or IFR, which was introduced when Raghuram Rajan was the governor of the central bank.

Banks are staring at significant mark-to-market losses in the April-June quarter, as some of them approached the Reserve Bank of India, seeking a one-time waiver after the hike. bond yields,

Banks are trying to spread the losses over four quarters instead of just the June quarter.

Lenders with IFR provisions are in a better position for June-quarter earnings. During the three-month period, the benchmark bond yield rose 76 basis points to a high of 7.60% on June 13. When yields rise, prices fall. The benchmark bond yield stood at 7.46% on Wednesday.

“The mark-to-market loss is hypothetical, which may well be met in the coming quarters,” said Sushant Kumar Mohanty, general manager of the Treasury.

, “Banks set IRFs when they have earned Treasury profits can help cushion against erosion of profits in the June quarter.”

Bond dealers believe a pullback is likely after the benchmark gauge touches a high of 8%.

According to market sources, some banks do not have adequate IFR, which should impact their margins. Medium to large public sector banks are expected to report losses of over Rs 350 crore and treasury of over Rs 1,000 crore.

Big private sector banks Sovereign bond portfolios are likely to do better with a larger universe.

Ashish Vaidya, managing director, DBS Bank, said, “Banks with IFRs are better positioned to avoid mark-to-market losses. “It all depends on the individual banks how they have provided.”

Banks with better financial standing have the means to cover losses because they do not sell securities. They report MTM losses in their books for quarterly earnings. However, some banks reported losses from their “Available for Sale” (AFS) or “Held for Trading” (HFT) books.

Long ago in 2015, Rajan introduced the IFR, which has gone through revisions over the years. The accounting treatment allows a reserve provision against the MTM notional gains in the investment portfolio. This can be adjusted to cover the loss from the investment book.

Banks will create an IFR until the amount of the IFR is at least 2% of the HFT and AFS portfolio, on an ongoing basis, by transferring an amount not less than two thresholds to the IFR: net profit on the sale of investments during the year and Net profit for the year.

During the first quarter of the financial year, BSE Bankex The Sensex fell 8.4%, compared to a fall of 9.46%. The sector gauge is heavily loaded with private banks, and it moderated the decline.

During the same period,

() Shares in ICICI Bank declined nearly 7% versus 3.7%.