Context: The Reserve Bank of India has decided to transfer a sum of Rs. 1,76,051 crores to the Government of India as per the recommendations made by Bimal Jalan Committee.
About the committee:
- RBI constituted a panel on the economic capital framework which was headed by ex-RBI governor Bimal Jalan.
- The committee was composed of Former RBI Governor Bimal Jalan (Chairman), Former Deputy Governor of RBI Rakesh Mohan (deputy chairman), Economic Affairs Secretary Subash Chandra Garg (member), RBI Deputy Governor N.S. Vishwanathan (member), and RBI board member Bharat Doshi (member), RBI board member Sudhir Mankad (member).
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The economic capital framework reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
Need of the committee
- The central government was sure that RBI is sitting on much higher reserves than it actually needs to tide over financial emergencies.
- There are examples of some central banks around the world (like the US and UK) keep 13% to 14% of their assets as a reserve compared to RBI’s 27%.
- The government and the central bank were at loggerheads over other issues including relaxation of prompt corrective action norms on weak banks, special liquidity window for Non-Banking Financial Companies (NBFC).
- The RBI Act makes it clear that all the profits of the Reserve Bank must be transferred to the government. However, the issue is what are the profits based on the accounting method used.
Tasks to be done by the committee:
- To review the status of reserves and buffers presently provided for by the RBI
- To propose a suitable profits distribution policy taking into account all the likely situations of the RBI
- To review best practices followed by the central banks globally in making assessment and provisions for risks
- To suggest an adequate level of risk provisioning that the RBI needs to maintain
Recent recommendations made by the committee:
- Two Components of the economic capital of RBI:
- Realized equity: 7.2 per cent of RBI balance Sheet. It is also called the Contingent Risk Buffer (CBR).
- Revaluation balances.
Revaluation reserves comprise of periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.
Realized equity, which is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings. It is also called the Contingent Risk Buffer (CBR).
- Surplus distribution policy: The Committee has recommended the policy to target the level of realized equity to be maintained by the RBI
- Range of Contingent Risk Buffer: The committee has given a range of 5.5-6.5% of RBI's balance sheet for Contingent Risk Buffer while transferring the remaining excess reserves worth Rs.52,637 crore to the government.
- Transfer of surplus: Rs 123,414 crore of surplus for the year 2018-19 as per the revised Economic Capital Framework (ECF) would be transferred by RBI to Government.
- Monetary and financial stability risk provisions: The Committee recommends that the size of the monetary and financial stability risk provisions should be maintained between 4.5 to 5.5 per cent of the balance sheet.
Benefits of the recent move of RBI:
- The government is set to get a dividend of Rs 95,414 crore during the current financial year. This will be in addition to a surplus fund of 1.76 lakh crore
- It will allow the government to meet deficit targets, infuse capital into weak banks to boost lending and fund welfare programmes
- The government will be able to help the banks with this fund. Union Finance Minister Nirmala Sitharaman has already announced a capital infusion of Rs 70 thousand crores in public sector banks, which is expected to fetch Rs 5 lakh crore in the market
- With tax revenues falling short of expectations, any off-budget receipts from the RBI will be of great help to the central government.
