The central board of the Reserve Bank of India (RBI) decided on August 26 to transfer a sum of Rs 1,76,051 crore to the government, comprising of Rs 1,23,414 crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF).

What is the ECF?

The RBI has developed an Economic Capital Framework (ECF) to provide an objective, rules-based, transparent methodology for determining the appropriate level of risk provisions to be made under Section 47 of the Reserve Bank of India Act, 1934.

The framework was developed in 2014–15, and while it was used to inform the risk provisioning and surplus distribution decisions for that year, it was formally operationalised in 2015-16.

The ECF was supplemented by a Staggered Surplus Distribution Policy (SSDP) in 2016-17 to smoothen the cyclicality in RBI’s economic capital and incorporate a certain degree of flexibility in surplus distribution.

How are RBI’s reserves formed?

The RBI gets its funds through three ways. Currency and Gold Revaluation Account (CGRA) is made up of the gains on the revaluation of foreign exchange and gold. The Contingency Fund (CF) is designed to meet contingencies from exchange rate operations and monetary policy decisions, including depreciation in the value of securities. The Asset Development Fund (ADF) has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions.

What does the RBI Act say about surplus transfer?

The RBI transfers its surplus profits to the government in terms of the provisions of Section 47 of the Reserve Bank of India Act, 1934 which is as follows: “After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the central government.”

Row over surplus transfer

The surplus transfer, commonly called “dividend”, this year is almost double the previous record of Rs 65,876 crore in 2015-16. In the previous year, the RBI transferred Rs 50,000 crore, while in 2016-17, the dividend was only Rs 30,659 crore following demonetisation.

The Narendra Modi government and the RBI under its previous governor Urjit Patel had been at loggerheads over the optimum level of surplus capital with the central bank.

As a result, the RBI in its November 2018 board meeting decided to form a committee to review the ECF for the Reserve Bank.

However, Patel quit before the committee could be formed. Subsequently, the panel was constituted in consultation with new RBI governor Shaktikanta Das on December 26.

What were the Jalan panel’s recommendations?

The RBI, in consultation with the government, had constituted an expert committee to review the ECF with Bimal Jalan as its 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.

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 recognised 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 central bank in view of its role as the monetary authority and the lender of last resort.

It was recommended that the contingency fund (CF) to be maintained within a range of 5.5 to 6.5 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.

The current CF outstanding stood at 6.8 per cent of the RBI’s balance sheet and hence, the excess from the pre-decided range of 5.5 to 6.5 per cent is written back. Here, the panel decided to go with the lower threshold of 5.5 per cent and hence the excess Rs 52,637 crore has been written back (to be transferred to the Centre).

The committee recommended keeping the RBI’s economic capital levels (CGRA) in the range of 20-24.5 per cent of the balance sheet. in June 2019, it stood at 23.3 per cent and the committee felt that there was no need to add more to it. So the full net income of the RBI - Rs 1,23,414 crore - was to be transferred to the Centre.

That Rs 1.23 lakh crore plus the Rs 52,637 crore is what comprises the Rs 1.76 lakh crore that the RBI has decided to transfer to the government.

The government has already received Rs 40,000 crore during FY19. In February, RBI had announced a Rs 28,000 crore interim dividend, taking the total dividend transfer to the government to Rs 68,000 crore.

Will it affect the RBI funds?

The RBI had been contributing a chunk of its profit to the contingency fund up to 2012-13. Between 2010-11 and 2012-13, the RBI had set aside 32-45 per cent of its gross income to this fund. Hence CF was a high 9-10 per cent of total assets. However, additions to this fund ceased since 2013-14. The entire surplus in the RBI’s coffers was being transferred to the Centre. 

From 2016-17, the RBI once again started transferring funds to the contingency fund. The contingency fund has been 6-7 per cent of assets over the past three to four years.

With the contingency fund now at the lower band of the desired 5.5-6.5 per cent of the balance sheet, the RBI is left with little room in future.

Much of the excess provisions under the RBI’s contingency fund has been transferred in the current fiscal year. So, a similar payout may not happen in the next financial year. This raises the concern over the Centre dipping into the central bank’s coffers time and again for its needs.

However, the receipts from the RBI will give a fillip to the government's efforts to boost the economy from a five-year low.