The Reserve Bank of India (RBI) at its board meeting on Monday decided to transfer a whopping ₹1.76 lakh crore to the Centre — including interim dividend of ₹28,000 crore paid in February — which is likely to address the precarious fiscal situation of the government to a great extent.
The ₹1.76 lakh crore includes the central bank’s 2018-19 surplus of ₹1.23 lakh crore and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the Board meeting.
The RBI said as financial resilience was within the desired range, the entire 2018-19 net income of ₹1.23 lakh crore has been transferred.
The RBI had formed a committee chaired by former Governor Bimal Jalan to review its economic capital framework and suggest the quantum of excess provision to be transferred to the government.
The committee was formed after a demand from the government for more money. The RBI Board has accepted all the recommendations of the Jalan committee.
“The committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability,” the central bank said in a statement.
The panel recommended a clear distinction between the two components of economic capital - realized equity and revaluation balances. It was recommended that realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings, while revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable.
The committee also recognised that RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’, (a monetary or financial stability crisis), which has been consciously maintained with the RBI in view of its role as the Monetary Authority and the Lender of Last Resort.
“This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5% to 5.5% of the RBI’s balance sheet,” the RBI statement said.
“This CRB comprising 5.5 to 4.5% for monetary and financial stability risks and 1.0% for credit and operational risks,” the RBI added.
The ‘Surplus Distribution Policy’, as recommended by the committee, says only if realized equity is above its requirement, the entire net income will be transferable to the Government.
The RBI said the available realised equity stood at 6.8% of balance sheet, and there was excess of risk provisioning 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% of balance sheet and the resultant excess risk provisions of ₹52,637 crore were written back,” RBI said.
“Clearly the amount is higher than expected and with additional ECF transfer, the ammunition from tax shortfall could be partly met, thus alleviating some of the fiscal fragilities,” said Madhavi Arora, Economist with Edelweiss Securities.