Business

RBI crisis fund short of target

Mumbai 26/07/2011 Enterance of RBI building in Mumbai on Tuesday, July 26, 2011. Photo: Vivek Bendre

Mumbai 26/07/2011 Enterance of RBI building in Mumbai on Tuesday, July 26, 2011. Photo: Vivek Bendre   | Photo Credit: Vivek Bendre

For the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund.

Contingency funds with the Reserve Bank of India (RBI), used in case of unforeseen shocks, have fallen to 8.4 per cent of total assets, against a target of 12 per cent, as shown in its Annual Report for 2014-15 released on August 27.

For the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund. The balance in these funds, therefore, has barely changed since 2013, when they made up 10.1 per cent of total assets.

While the total in these two funds stood at Rs.2,424 billion in 2012-13, it was Rs.2,434 billion in 2014-15.

The capital requirements of a central bank can vary considerably depending on a number of factors, according to the annual report.

“The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital,” the report said.

“A central bank may require recapitalisation, precisely at a time when the fiscal position is under strain, say, due to a financial crisis,” it added.

“In the case of extreme situations, the RBI needs funds to cope. For example, if a systemically important bank goes bankrupt, then the RBI has to take its losses onto its own balance sheet,” a former Deputy Governor of the RBI told The Hindu.

The former Deputy Governor of the RBI, however, said extreme situations are unlikely, and the quantum of funds with the RBI — even without additions in the last two years — was enough.

The annual report also showed that the RBI had been transferring 99.9 per cent of its profits to the government, without keeping any amount for itself. This is a sharp increase from the 40-50 per cent it had transferred in the 2010-13 period.

In the financial year 2014-15, the RBI transferred Rs.659 billion to the government coffers, up from Rs.150 billion in 2010-11.

“There is little clarity about this. Is it being used to camouflage the government’s fiscal deficit situation? What is the purpose of this increased transfer amount,” the former deputy governor said.

In 2015, the Bank of England transferred a mere 93 million pounds to the government while the U.S. Federal Reserve is required by law to transfer most of its profits to the government.

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Printable version | Feb 20, 2020 8:28:32 PM | https://www.thehindu.com/business/rbi-crisis-fund-short-of-target/article7617101.ece

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