RBI Board approves Jalan Committee report
MUMBAI: The Central Board of Reserve Bank of India (RBI) on Monday decided to transfer the surplus sum of Rs1.76 lakh crore to the Government of India comprising Rs1.23 lakh crore of surplus for the year 2018-19 and Rs52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board.
The amount is computed to be more than one per cent of the GDP of the country and is expected to help the government in reining in the fiscal deficit at a time when the country is passing through multiple structural and financial pains
This decision follows the approval of the recommendations of Bimal Jalan Committee that was constituted to fix the propriety of transferring the RBI surplus to the government exchequer – a sensitive debate that may have hastened the premature exit of the RBI’s former governor Dr Urjit Patel
It was a couple of months back, RBI, in consultation with the Government of India, constituted the Expert Committee to Review the Extant Economic Capital Framework of the Reserve Bank of India with Dr Bimal Jalan as the panel’s chairman.
“The Committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved,” said an RBI note issued on Monday.
The Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.
The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance. A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was also recommended by the Committee as 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.
Application of recommendations
The Central Board of RBI accepted all the recommendations of the Committee and finalized the RBI’s accounts for 2018-19 using the revised framework to determine risk provisioning and surplus transfer.
Given that the available realized equity stood at 6.8 per cent of balance sheet, while the requirement recommended by the Committee was 6.5 per cent to 5.5 per cent of balance sheet, there was excess of risk provisioning to the extent of Rs11,608 crore at the upper bound of the Contingent Risk Buffer (CRB) and Rs52,637 crore at the lower bound of CRB.
“The Central Board decided to maintain the realized equity level at 5.5 per cent of balance sheet and the resultant excess risk provisions of Rs52,637 crore were written back,” the RBI release explained.
While the revised framework technically would allow the RBI’s economic capital levels as on June 30, 2019 to lie within the range of 24.5 per cent to 20.0 per cent of balance sheet (depending on the level of realized equity maintained and availability of revaluation balances), the economic capital as on June 30, 2019 stood at 23.3 per cent of balance sheet.
The committee observed that as financial resilience was within the desired range, the entire net income of Rs1,23,414 crore for the year 2018-19, of which an amount of Rs28,000 crore has already been paid as interim dividend, will be transferred to the Government of India.
This is in addition to the Rs52,637 crore of excess risk provisions which has been written back and consequently will be transferred to the Government.
It was also observed that as on June 30, 2019, the RBI stands as a central bank with one of the highest levels of financial resilience globally.