In Boost to Modi Govt, RBI Agrees to Make Record Rs 1.76 Lakh Crore Transfer

The recommendations of the Jalan panel report, which has been accepted by the central bank, pave the way for greater fiscal leeway.

New Delhi:The Reserve Bank of India (RBI) will transfer a little over Rs 1.76 lakh crore to the Narendra Modi government, in a move that will give greater fiscal leeway to the Centre and bring to an end the contentious debate over the central bank’s ‘excess reserves’.

In doing so, the RBI’s central board has agreed to accept all the recommendations of the Bimal Jalan committee, which was set up in December 2018 to re-evaluate the central bank’s economic capital framework (ECF).

Out of the Rs 1.76 lakh crore, of which Rs 28,000 crore has already been transferred as an interim dividend, a little over Rs 52,000 crore is what the committee has defined as “excess provisions’ or excess capital.

“The Central Board… today decided to transfer a sum of Rs 1,76,051 crore to the Government of India (Government) comprising of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board today,” a RBI press release noted.

Every year, the RBI makes a ‘surplus transfer’ to the Centre, typically defined as excess income over expenditure. In the last six years, this transfer has ranged between Rs 30,000 crore to Rs 65,000 crore.

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The problem revolves around the fact that the RBI doesn’t transfer all of its ‘excess income’, or profit, to the government. It holds back some of it as a safeguard for a rainy day and calls that its ‘reserves’.

Over the last year, the central bank and the Centre, especially under former RBI governor Urjit Patel’s tenure, have bickered over whether the RBI could hand over a greater portion of its ‘excess reserves’.

These reserves – which are categorised into different buckets ( currency and gold revaluation account, investment revaluation account, asset development fund and contingency fund) – amounted to almost Rs 9.6 lakh crore for FY’18. Two of these buckets are bigger than the others: the RBI’s contingency fund is at Rs 2.5 lakh crore, while the currency and gold revaluation reserve is at Rs 6.91 lakh crore.

In the last year, media reports had indicated that the Modi government wanted up to Rs 3 lakh crore of the central bank’s reserves. This does not appear to have happened.

The Jalan panel has recommended that a clear distinction should be effected between what it calls the ‘realised equity’ component of the central bank’s reserves and the ‘revaluation component’.

It notes:

“Given that the available realized equity stood at 6.8% of balance sheet, while the requirement recommended by the Committee was 6.5% to 5.5% of balance sheet, there was excess of risk provisioning to the extent of ‘11,608 crore at the upper bound of CRB and ‘52,637 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 `52,637 crore were written back.” [Emphasis added by The Wire].

The panel also notes that the new revised ECF framework would allow the RBI’s economic capital levels to lie within the range of 24.5% to 20% of balance sheet. Since “financial resilience” is within a “desired range, this paves the way for transferring the entire net income of Rs 1.23 lakh crore.

The statement points out:

“The economic capital as on June 30, 2019 stood at 23.3 per cent of balance sheet. As financial resilience was within the desired range, the entire net income of Rs 1,23,414 crore for the year 2018-19, of which an amount of Rs 28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the Rs 52,637 crore of excess risk provisions which has been written back and consequently will be transferred to the Government.” [Emphasis added by The Wire]