- In a move that will help the Centre bridge its fiscal deficit, the Reserve Bank of India board has approved a record surplus transfer of Rs 1.76 lakh crore to the government, which includes about Rs 1.23 lakh crore net income for the year 2018-19 and Rs 52,637 crore of excess provisions.
- The move is based on the recommendation of Bimal Jalan committee on transfer of excess reserves to the government.
The Functions of RBI:
- The RBI is mandated to keep inflation or prices in check,
- It is also supposed to manage the borrowings of the Government of India and of state governments
- RBI supervise or regulate banks and non-banking finance companies;
- RBI also manage the currency and payment systems.
Central bank’s income sources:
- Return on its foreign currency assets
- Interest earned on rupee-denominated government bonds or securities
- Interest earned on lending to banks for very short tenures, such as overnight
- Commission received on management of borrowings of state governments and the central government
- Revaluation of foreign assets and gold
Central bank’s main expenses:
- Printing of currency notes and on staff
- Commissions to banks for undertaking transactions on behalf of the government across the country and to primary dealers including banks, for underwriting some of these borrowings
- The central bank’s total costs are only about a seventh of its total net interest income, generating a large surplus.
The main types of RBI’s reserves are:
- The Currency & Gold Revaluation Account (CGRA):
- This represents the value of the gold and foreign currency that the RBI holds on behalf of India.
- It makes up the biggest share of RBI’s reserves.
- Variations in this represent the changing market value of these assets. Thus, the RBI notionally gains or loses on this count according to market movements.
- For example, last year the CGRA increased by 30.5% largely because of the depreciation of the rupee against the US dollar and due to an increase in the price of gold.
- The investment revaluation account (IRA):
- The IRA is sub-divided into IRA-foreign securities (IRA-FS) and IRA-rupee securities (IRA-RS).
- The IRA-FS reflects the unrealised gain or loss on mark-to-market of foreign securities while the IRA-RS is on account of marking rupee securities.
- The asset development fund (ADF):
- The ADF has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions.
- The Contingency Fund(CF) :
- It is a specific provision meant for meeting unexpected contingencies that arise from RBI’s monetary policy and exchange rate operations.
RBI’s reserves at present :
- For the year ending June 2018, RBI had total reserves of Rs 9.59 lakh crore, comprising mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore).
Why does a central bank need capital?
- The Central banks that have foreign assets need capital to absorb potential losses.
- The RBI needs capital to shield the economy from monetary and financial shocks.
- It uses the reserves to perform functions such as price and exchange stability.
- In case of unstable governments, monetary authorities carry a bigger burden, and the Central bank would need more capital in such a situation.
- The reserves give independence to a central bank..
Government’s claim over RBI’s surplus:
- As the Government of India is the sole owner of the RBI, it can make a legitimate claim to this surplus.
- RBI generates more surplus than the entire public sector put together.
- Moreover, RBI does not pay income-tax or any other tax, including wealth tax to the government.
- Out of the total surplus, RBI sets aside some as equity capital to maintain its creditworthiness and pays remaining surplus to the government under the provisions of Section 47 of the Reserve Bank of India Act, 1934.
- As per Section 47 of the RBI Act, profits of RBI are to be transferred to government, after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations.
- By paying to the government as dividend, the RBI is putting back into the system the money it has made from it.
- The payout of government is done in August, after the completion of the bank’s July-June accounting year.
RBI’s Surplus in 2018-19:
- This year’s surplus of Rs 1.23 lakh crore is the largest ever for the RBI.
- Reasons for huge surplus:
- In first half of 2018-19, RBI did huge dollar intervention.
- RBI also made money by lending money to banks and buying back interest-bearing bonds through open market operations.
Background – Bimal Jalan Committee on transfer of reserves to government:
- The RBI Act does not specify the amount to be transferred to the government and there is no consensus on the right level of capital for a central bank.
- Thus, the transfer of the excess provision was a bone of contention between RBI and the government.
- In 2018, the RBI had formed a committee chaired by former Governor
Bimal Jalan to review its economic capital framework (ECF) and suggest
the quantum of excess provision to be transferred to the government.
- The ECF prescribes the minimum amount of reserves RBI must hold to maintain financial stability in the forex and money markets in a worst-case scenario.
The Key Recommendations of the Bimal Jalan Committee:
- The panel identified RBI’s capital in two parts:
- Realised equity (actual profits)
- Revaluation balances (where the value of reserves had gone up)
- The 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 i.e. Revaluation balance of the central bank should not be distributed.
- The entire net income of RBI can be transferable to the government only if realised equity is above its requirement.
- The risk provisioning of RBI (for monetary, financial and external
stability risks)has been made primarily from retained earnings and is
referred to as the Contingent Risk Buffer (CRB) .
- CRB has to be maintained within a range of 6.5% to 5.5% of the RBI’s balance sheet.
- The Central Board has decided to maintain the realized equity level at 5.5% of balance sheet and the resultant excess risk provisions of ₹52,637 crore were written back.
Surplus transfer based on Bimal Jalan Committee recommendations:
- The RBI Board has accepted all the recommendations of the Jalan committee.
- The Rs 1.76 lakh crore includes the central bank’s 2018-19 surplus of Rs 1.23 lakh crore and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the Board meeting.
Significance of the transfer:
- The move will buoy the government’s non-tax revenues at a time when tax collections have been subdued due to an economic slowdown.
- Bond yields will soften as the government will not need to borrow more to meet its requirements.
- Lower bond yields result in lower interest rates in the system which benefit corporates and therefore improve stockmarket sentiment as well.