RBI’s Central Board in August decided to transfer a record surplus of Rs 1.76 lakh crore to the government.
Which committee recommended the transfer of excess Capital ?
- The RBI Board accepted the recommendations of Economic Capital Framework (ECF) headed by former Governor Bimal Jalan which called for the Central Board to transfer a surplus of Rs 1.23 lakh crore and Rs 52,637 crore of excess provisions made over the years.
- This marks the first time the RBI will be paying out such a huge amount, a one-off transfer.
Economic Capital Framework
The economic capital framework provides a methodology for determining the appropriate level of risk provisions and profit distribution to be made under Section 47 of the RBI Act, 1934.
- It also recommended a surplus distribution policy which targets not only the total economic capital but also the realized equity level of the RBI’s capital.
- This will help bring about greater stability of surplus transfer to the government, with the quantum of the latter depending on balance sheet dynamics as well as the risk equity positioning by the Central Board.
- The committee defines economic capital as a combination of realized equity and revaluation reserves.
- It recommended that realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings.
- While revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable.
- This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5% to 5.5% of the RBI’s balance sheet.
- The report recommended a review of the Economic Capital Framework every five years. However, in case of a significant change in the RBI’s risks and operating environment, an intermediate review may be considered.
- It suggested that an interim dividend to the government must only be made in exceptional circumstances.
- The committee recommended a more transparent presentation of the RBI’s annual accounts with regard to the components of economic capital.
- The Committee recommended the alignment of the financial year of RBI with the fiscal year of the government for greater cohesiveness in various projections and publications brought out by RBI.
Keeping these recommendations in view, the central board decided to set the realized equity level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth ₹52,637 crore to the government.
What are the RBI’s Sources of Income ?
- A significant part comes from RBI’s operations in financial markets, when it intervenes for instance to buy or sell foreign exchange.
- Open Market operations, when it attempts to prevent the rupee from appreciating.
- As income from government securities it holds.
- As returns from its foreign currency assets that are investments in the bonds of foreign central banks or top-rated securities.
- From deposits with other central banks or the Bank for International Settlement or BIS.
- Lending to banks for very short tenures and management commission on handling the borrowings of state governments and the central government.
The central bank’s total costs, which includes expenditure on printing and commissions forms, is only about 1/7th of its total net interest income.
Is there a provision of the RBI transferring the surplus to the government ?
- RBI transfers its surplus annually to the government, after making adequate provisions for contingencies or potential losses.
- The profit that is distributed has varied, averaging over Rs 50,000 crore over the last few years.
- The level of surplus or profits the RBI pays to the government has been an issue of conflict for a long time.
What is the Nature of the Arrangement between the Government and RBI ?
- RBI is not a commercial organisation like banks and other companies owned or controlled by the government to pay a dividend to the owner out of the profit generated.
- Though it was promoted as a private shareholders bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalised it in January 1949, making the sovereign the owner.
- This is why these are called transfers to the government, rather than dividends.
- What the central bank does, therefore, is to transfer the surplus that is, the excess of income over expenditure to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.
What can the government do with Excess Capital?
- Normally, the money is transferred to the Consolidated Fund of India from which salaries and pensions to government employees are paid and interest payments done, besides spending on government programmes.
- The large payout can help the government cut back on planned borrowings and keep interest rates relatively low.
- It will provide space for private companies to raise money from markets.
- If the government manages to meet its revenue targets, the windfall gain can lead to a lower fiscal deficit.
- The Government can also earmark these funds for public spending or specific projects, which could lead to a revival in demand in certain sectors and boost economic activity.
- It can also be used to provide fiscal stimulus to a sagging economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.