13-Jun-2019: No consensus yet on Economic Capital Framework

The Reserve Bank of India (RBI)-appointed committee to review the economic capital framework of the central bank failed to arrive at a consensus during a meeting held recently, leading to a delay in finalising its report. The six-member committee headed by former RBI governor Bimal Jalan decided to meet once again before submitting its report by the end of this month.

The committee, formed in December 2018, was supposed to submit its report by April 8, 2019, but it was later given a three-month extension. One of the key mandates of the committee was to determine the level of surplus that the RBI should hold.

There will be at least one more round of meeting to be held later this month. The main difference of opinion has arisen between the panel members and the government’s representative on the panel — Economic Affairs Secretary S C Garg — over the transfer of the RBI’s ‘excess’ capital reserves.

While most panel members were in favour of a phased transfer of the RBI’s capital reserves to the government over the years, the government's view voiced by Garg is for a one-time transfer.

The government is of the view that the capital reserves held by the RBI are among the highest in the world and is not being put to good use. The “excess” capital of the RBI could have been used “to support the banks just as was done in USA during the financial crisis.

Usually, the RBI, which follows a July-June calendar, transfers dividend to the central government after closing its accounts in August. While transferring the dividend, the central bank keeps a share of surplus towards various risks and reserves every year, according to its economic capital framework.

The RBI needs adequate capital reserves for monetary policy operations, currency fluctuations, possible fall in value of bonds, sterilisation costs related to open-market operations, credit risks arising from the lender of last resort function and other risks from unexpected increase in its expenditure.

The RBI has maintained the view that it needs to have a stronger balance sheet to deal with a possible crisis and external shocks. Capital transfer from the RBI to the government also assumes importance in the wake of dwindling tax collections and the government's desire to keep the fiscal deficit at 3.4 per cent of GDP in the Budget, the same level as was pegged in interim Budget for FY20.

26-Dec-2018: RBI forms panel on Economic Capital Framework

The RBI named former governor Bimal Jalan as the head of the expert panel that will decide on the appropriate size of reserves that the central bank should maintain and the dividend it should give to the government. Former economic affairs secretary Rakesh Mohan will be the vice chairman. In a statement, the Reserve Bank of India (RBI) said the expert committee will submit its report in 90 days from the first day of its meeting and has been asked to study global practices and suggest if the central bank was holding reserves and buffer capital in surplus of the required.

The government and the RBI under the previous governor Urjit Patel had been at loggerheads over the ₹ 9.6 lakh crore surplus capital with the central bank. The Finance Ministry was of the view that the buffer of 28 per cent of gross assets maintained by RBI is well above the global norm which is around 14 per cent.   

The six-member committee now been constituted also includes Economic Affairs Secretary Subhash Chandra Garg and two members of RBI central board - Bharat Doshi and Sudhir Mankad. RBI deputy governor NS Vishwanathan is the sixth member of the committee.    

The Expert Committee would review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI. It will also review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.   

The panel will propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required.

The RBI has also entrusted the panel to suggest an adequate level of risk provisioning that the RBI needs to maintain.