RBI Surplus Transfer to the Government

In this article, we are providing information regarding the surplus fund transfer by Reserve Bank of India (RBI) to the central government. This was decided by RBI on the recommendations made by Bimal Jalan panel, here we also providing information about Jalan Committee and income & expenditure of Reserve Bank of India (RBI).

On August 26, 2019, The Central Board of the Reserve Bank of India has decided to transfer a sum of Rs 1.76 lakh crore to the Union Government which comprises of Rs 1.23 lakh crores surplus for the year 2018-2019 and Rs. 52,637 cr. of excess provisions identified as per the revised Economic Capital Framework. This is the highest ever transfer from RBI to the Government. The surplus transfer is 1.25% of the GDP (2018-19). The transfer of the amount from RBI to the Government is recommended by the Bimal Jalan Committee.

Bimal Jalan committee and its recommendation:

The Reserve Bank of India in consultation with the Union Government had appointed a six members committee headed by former RBI governor Bimal Jalan, to review the Economic Capital Framework and decide how much amount out of total reserve is to be transferred to Government. Other members of the committee include former deputy governor of RBI - Rakesh Mohan as vice-chairman, Finance secretary - Subhash Chandra Garg as a member, RBI deputy governor N S Vishwanathan as member and RBI’s central board members - Bharat Doshi and Sudhir Mankad as members.

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.

Major recommendations of the Committee with regard to risk provisioning and surplus distribution are:

The RBI’s reserves consist of Currency and Gold Revaluation Account (CGRA), the investment Revaluation Account, the Asset development fund (ADF) and the Contingency Fund (CF). The panel recommended a clear distinction between the two components of the economic capital of RBI.

Revaluation Balances: This type of fund is adjusted depending on the changes in the value of dollar and gold. This is a standard accounting requirement. A sharp depreciation of the rupee or a fall in international gold prices will decrease the reserve. Most of the reserve that RBI holds is in the form of revaluation reserves.
Contingency reserve, which is used for all risks/losses primarily built up from earnings. It is also called the Contingent Risk Buffer (CBR).

The committee has given a range of 6.5 to 5.5% of RBI's balance sheet for Contingent Risk Buffer.
As per the recommendation, the RBI has decided to set the CBR level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth Rs. 52,637 crore to the government.
If CBR is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income transferred to the Government.
However, keeping CBR below 5.5% will reduce RBI's space to manoeuvre monetary policy.
The committee also recommends that the framework may be reviewed in every five years. if there is a change in the RBI’s risks and operating environment, an intermediate review may be considered.
The committee has also recommended that the central banks accounting year should be aligned with the financial year, which could reduce the need for paying an interim dividend.

Note: Economic Capital Framework is the capital required by the RBI by taking into account all types of risks. It is the capital that RBI holds for any risk that may arise in the future.

Why RBI pay a dividend to the GOI?

The RBI is a statutory body under the RBI Act, 1934. Section 47 of the RBI Act states that profits made by the RBI from its operations have to be sent to the Centre.

GOI is the owner of Reserve Bank of India, therefore, central govt. is the sole shareholder of the RBI. Therefore like any other company, any profit made by the RBI has to be transferred to its only shareholder. Therefore RBI pays a dividend to the central government.

WHAT WAS THE ISSUE?

According to a report, the total reserves with the RBI in 2017-18 was Rs 10 lakh crores. The Government believed that the reserves with the RBI is quite high so the government wants that the RBI to transfer at least one-third of its reserve assets so that Government can infuse more capital into PSBs to meet the BASEL III guidelines. However, RBI was opposing this because RBI needs sufficient amount of reserves to deal over unforeseen circumstances in the future.

To sort this issue the Government had appointed Bimal Jalan Committee to review the Economic Capital Framework and decide how much amount out of total reserve is to be transferred to Government.

Does Wherefrom RBI earn Money?

RBI is the sole authority of Foreign Exchange Reserve while buying and selling it, RBI earns money.
As a trader of government securities it holds, through open market operation, it buys and sell government securities and earn a profit.
Income from foreign currency asset that are investments in the bonds of foreign central banks or top-rated securities
RBI gets interests from a loan given by it to various commercial banks, state governments, and central governments.
RBI also earns commission on handling the borrowings of state governments and the central government.

Expenses of the RBI:

On printing currency notes
Salary and emoluments to the staffs
Commission to banks for undertaking transactions on behalf of the government and to primary dealers that include banks for underwriting some of these borrowings.

Conclusion:

RBI transferring the money has much significance on economic restructuring as the economy is slowing down. The govt. can use this money in the following ways:

For Recapitalization of Public Sector Banks.
This capital can be used to meet the fiscal deficit target.
This money will help the govt. to deal and overcome the ongoing slow economy.
This surplus can be used to provide relief packages to various sector specially the automobile and textile sector.

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