By Shelesh Joshi and Kavita Iyer 
Mumbai, May 19: The RBI scraps IFR requirement for most commercial banks, marking one of the most consequential regulatory shifts India’s banking sector has seen in recent years. The decision that the RBI scraps IFR requirement has now been formally converted into binding regulation, with final amendment directions confirmed in the second week of May 2026 following a public consultation process that began when RBI Governor Sanjay Malhotra first announced the proposal on April 8, 2026, during the central bank’s monetary policy statement.
Understanding exactly what it means when the RBI scraps IFR requirement is essential for every investor, banker, and financial professional tracking business news India today. The move simultaneously removes the Investment Fluctuation Reserve (IFR) obligation for commercial banks and scraps a longstanding condition that restricted how banks count quarterly profits in their capital adequacy calculations. Together, these two reforms represent the most significant easing of bank capital framework rules in recent memory, and their combined effect on Tier 1 capital ratios, CRAR computation, and lender flexibility is already drawing close attention from investors, credit rating agencies, and bank treasuries nationwide.
Why the RBI Scraps IFR Requirement After Two Decades
To fully appreciate why the RBI scraps IFR requirement now, it helps to understand what the reserve was originally designed to do. The Investment Fluctuation Reserve was a mandatory buffer that commercial banks built by setting aside a portion of their trading profits. Banks were required to maintain the IFR at a minimum of 2 per cent of their Available for Sale (AFS) and Fair Value Through Profit and Loss (FVTPL) portfolios. When bond yields spiked and portfolio values fell, the reserve cushioned the blow on reported earnings instead of forcing banks to absorb large one-time losses or seek regulatory permission to spread losses across reporting periods.
The logic was sound when it was introduced. Over two decades later, it stopped holding up. According to RBI Governor Sanjay Malhotra, as reported by Business Standard: “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.”
RBI Deputy Governor Swaminathan J was even more direct about why the RBI scraps IFR requirement makes regulatory sense today. He explained that the IFR has had a somewhat checkered history, introduced in a particular context, then withdrawn, and later reintroduced. There was persistent 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, as reported by Business Standard.
RBI Scraps IFR Requirement: Which Banks Benefit and Which Do Not
When the RBI scraps IFR requirement, not every lender receives the same treatment. The relief is specifically designed for commercial banks, which will be permitted to treat their existing IFR balance as Tier 1 capital by transferring it below the line to the Statutory Reserve, General Reserve, or Profit and Loss balance. Related provisions governing the operational mechanics of the reserve have been deleted from the regulatory framework entirely.
For smaller and more specialised lenders, the situation differs. Even as the RBI scraps IFR requirement for mainstream commercial banks, it has retained the IFR for payments banks in a modified form due to operational constraints. Payments banks must continue building IFR from realised gains on the sale of investments, subject to availability of net profit, until the reserve reaches at least 2 per cent of their AFS and FVTPL portfolios, assessed annually. Small finance banks and regional rural banks also remain outside the full removal framework under separate revised guidelines issued alongside the main directions.
This tiered approach explains why the RBI scraps IFR requirement selectively rather than universally. Larger commercial banks already maintain explicit Basel III capital charges for market risk and follow updated investment valuation norms prescribed by the RBI. For them, the IFR had become a redundant layer sitting on top of rules that already account for the same risks. Smaller lenders with less sophisticated risk management infrastructure continue to need the buffer in some form.
How Much Capital Is Freed When RBI Scraps IFR Requirement
The question that every investor asks when the RBI scraps IFR requirement is what this means for capital ratios in concrete numbers.
According to Anil Gupta, Senior Vice President and Co-Group Head of Financial Sector Ratings at ICRA, the removal will result in some improvement in reported Tier 1 ratios, since IFR is currently classified under lenders’ Tier 2 capital. As reported by Business Standard, Gupta said: “Given the strong capital ratios for most of the banks, the increase in Tier 1 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 to 12 basis points on Tier 1 capital ratio of banks.”
Broader market estimates are more generous. As per analyst estimates published after the April policy announcement, the total IFR corpus across banks sits between Rs 35,000 crore and Rs 60,000 crore. Transferring this to core capital could lift capital ratios noticeably, with mainstream lenders potentially seeing their positions improve by around 20 basis points, and some banks in line for gains of 20 to 30 basis points if they fully deploy the freed-up amounts.
Using the RBI’s own estimate of the banking system’s FVTPL book of Rs 22.8 lakh crore as of September 2025, analysis by Union Bank of India’s research desk estimates the reclassification could boost CET1 capital ratios by at least close to 25 basis points across the sector. That the RBI scraps IFR requirement at a time when the banking system’s aggregate CRAR already stood at a comfortable 17.1 per cent as of September 2025, well above the 9 per cent regulatory minimum, underscores that this reform is being made from a position of systemic strength rather than stress.
RBI Scraps IFR Requirement Alongside a Critical CRAR Reform
The moment the RBI scraps IFR requirement also coincided with a second major regulatory reform now in force. As reported by DD News and confirmed through an ANI dispatch dated May 9, 2026, the Reserve Bank of India formally revised guidelines related to the inclusion of quarterly profits in banks’ core capital calculations, removing a condition linked to provisioning for non-performing assets (NPAs).
Under the earlier rules, commercial banks were permitted to include quarterly profits in CRAR calculations only if incremental provisions for NPAs at the end of any of the four quarters of the previous financial year had not deviated by more than 25 per cent from the average of all four quarters. Any significant swing in provisioning, even one driven by legitimate credit management decisions, would disqualify a bank from counting that quarter’s profits in its capital ratio until the full financial year closed.
That constraint is now gone. In a press release, the RBI stated: “The Draft Directions were aimed to remove the qualifying condition of incremental provisions for NPAs. Feedback received on the drafts has been examined and considered while finalising the Amendment Directions.” As reported by Republic World and The Tribune, the central bank has issued three separate amendment directions covering commercial banks, small finance banks, and payments banks, making quarterly capital calculations simpler and more consistent across all lender categories. Together with the news that the RBI scraps IFR requirement, this CRAR reform delivers a double boost to bank capital management at the same time.
What Changes for Lending and Stability After RBI Scraps IFR Requirement
The practical consequences after the RBI scraps IFR requirement extend far beyond accounting adjustments. Removing the IFR obligation reduces profit and loss volatility and simplifies treasury operations. Banks now have greater flexibility to offset mark-to-market losses, support dividend decisions, or redirect capital toward expanded lending. The RBI scraps IFR requirement at a time when the economy needs steady credit flow to support growth in manufacturing, infrastructure, and consumption, making the timing of this reform particularly significant.
As per analysis published following the April policy, the regulatory relief complements the RBI’s broader focus on inflation management and currency defence while signalling confidence in the resilience of India’s banking system. The reform is characterised as delivering pro-cyclical relief, unlocking capital at a moment when credit expansion is a national economic priority. Small and medium enterprises, which typically face the sharpest constraints when banks turn cautious due to capital pressure, stand to benefit most from the additional lending headroom this reform creates.
Still, the fact that the RBI scraps IFR requirement does not guarantee an immediate surge in lending. Analysts caution that not all freed-up capital will flow directly into fresh loans. A portion may be directed toward strengthening other reserves or shoring up balance sheet resilience, with the full lending impact playing out more gradually over subsequent quarters as bank boards make deployment decisions.
The Long-Term Signal Behind RBI Scraps IFR Requirement Decision
The deeper significance of the RBI scraps IFR requirement decision is what it reveals about the central bank’s evolving regulatory philosophy under Governor Malhotra. The RBI has been methodically reviewing whether legacy requirements still serve their original purpose in an environment where Basel III capital frameworks, real-time mark-to-market accounting, and sophisticated risk management systems have collectively made older buffers redundant.
That the RBI scraps IFR requirement now aligns Indian banking norms more closely with international frameworks under which standalone investment fluctuation reserves are not a standard prudential feature. It removes a layer of regulatory complexity that had accumulated through decades of piecemeal amendments and brings greater consistency across lender categories. For international institutional investors and credit rating agencies assessing Indian banks against global peers, the move sends a clear signal: India’s banking regulation is maturing and modernising in step with global standards.
For now, the amendment directions are in force. Every time the RBI scraps IFR requirement language appears in bank board discussions and treasury reports over the coming quarters, it will serve as a reminder of both the flexibility unlocked and the responsibility that comes with it. The decisions bank boards make about deploying this capital will ultimately determine whether the historic moment when the RBI scraps IFR requirement translates into genuine credit acceleration across the Indian economy, or is absorbed quietly into the balance sheets of a banking system that is already in robust health.
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Tracking world politics, global markets, trade movements, policy decisions, and the changing balance of economic power.
Former financial consultant turned journalist, reporting on markets, industry trends, and economic policy.
- Kavita Iyer
- Kavita Iyer
- Kavita Iyer
- Kavita Iyer
