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Reserve Bank of India (RBI) decided to transfer Rs.1,76,051 crore to the Central Government after accepting recommendations of the Bimal Jalan Committee. The amount of Rs.1,76,051 crore includes the RBI Surplus money of Rs. 1,23,414 crore for the year 2018-19 and Rs. 52,637 crore of excess risk provision as per the revised Economic Capital Framework (ECF) suggested by the Committee.
What is RBI Surplus?
The RBI Surplus is the net income earned by the apex bank after deducting all the expenses. In the year 2018-19, the RBI Surplus stood at Rs 1,23,414 crore, which is now being transferred to the government. This income is known as Profit or Dividend incorporate language. The companies generally distribute the dividend or profit among the shareholders. However, RBI is not a company; its’ profits are considered as income itself.
What is Excess Risk Provision?
The excess risk provision of Rs.52,637 crore is the Contingency Fund maintained by the RBI. The Reserve Bank generally maintains the Contingency Fund at 6.8 per cent of the Balance Sheet. However, as per the Bimal Jalan Committee’s recommendations, this fund should fall within 5.5 to 6.5 per cent mark of the Balance Sheet. Hence, the RBI decided to maintain the Contingency Fund at 5.5 per cent and gave the excess provision to the Government of India.
Major recommendations of the Committee with regard to risk provisioning and surplus distribution
- RBI’s economic capital:
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.
- Risk provisioning for market risk:
The Committee has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk on which there was a growing consensus among central banks as well as commercial banks over the recent years. While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the Committee has recommended the adoption of a target of ES 99.5 per cent CL keeping in view the macroeconomic stability requirements. In view of the cyclical volatility of the RBI’s revaluation balances, a downward risk tolerance limit (RTL) of 97.5 per cent CL has also been articulated. Both levels were stress-tested for their adequacy by the Committee.
- Size of Realized Equity:
The Committee recognized that the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’ (a monetary/ financial stability crisis) which has been consciously maintained with the RBI in view of its role as the Monetary Authority and the Lender of Last Resort. Realized equity is also required to cover credit risk and operational risk. 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 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.
- Surplus Distribution Policy:
The Committee has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital vis-à-vis the earlier policy which targeted total economic capital level alone. Only if realized equity is above its requirement, will the entire net income be transferable to the Government? If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government. Within the range of CRB, i.e., 6.5 to 5.5 percent of the balance sheet, the Central Board will decide on the level of risk provisioning.
The RBI maintains four different Reserves which comprise of assets and earnings. These reserves are
- Contingency Fund –Reserve for tackling unexpected emergencies
- Asset Development Fund –Provides support to the RBI associates like National House of Banking
- Currency and Gold Revaluation Account –Gold Reserves and Foreign Exchange Assets
- Investment Revaluation Account –Fund available with the RBI to compensate losses and accommodate gains in foreign and domestic securities.
Why RBI Surplus is transferred to the Central Government?
Although RBI was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalised RBI in January 1949, making the sovereign its “owner”. What the central bank does, therefore, is 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.
Major concerns and Expert’s opinion:
The transfer of money from RBI to Government has been going on for years. It is not the first time that the apex bank has transferred its surplus money to the Government of India. However, this time, the transfer has raised concerns over the amount being transferred to Government ( It’s quite big – Rs.1,76,051 crores). The subject experts opine that if this huge amount of money is used judiciously by the government for infrastructure development facilities and so, then it is productive rather than using it as a solution to the NPA’s and Deficit financing.