Review capital framework every five years, says Jalan Committee

Jalan panel for aligning RBI’s accounting and financial years to cut need for paying interim dividend

August 27, 2019 10:46 pm | Updated 11:47 pm IST - Mumbai

The committee recommended that the RBI should put in place a framework for assessing the market risk of its off-balance sheet exposures in view of their increasing significance.

The committee recommended that the RBI should put in place a framework for assessing the market risk of its off-balance sheet exposures in view of their increasing significance.

The Bimal Jalan Committee, set up to review the Reserve Bank of India’s (RBI’s) economic capital framework, has suggested that the framework may be periodically reviewed after every five years.

“Nevertheless, if there is a significant change in the RBI’s risks and operating environment, an intermediate review may be considered,” the report, which was made public on Tuesday, said.

The panel recommended to align the central bank’s accounting year with the financial year which could reduce the need for paying interim dividend.

“It could reduce the need for interim dividend being paid by the RBI. The payment of interim dividend may then be restricted to extraordinary circumstances,” the report said.

For 2018-19, the RBI had paid ₹28,000 crore as interim dividend.

Historically, the July-June year would have been linked to the agricultural seasons which is not a consideration in these times, it said.

By doing so, the RBI would be able to provide better estimates of the projected surplus transfers to the government for the financial year for budgeting purposes.

The committee also recommended that the RBI should put in place a framework for assessing the market risk of its off-balance sheet exposures in view of their increasing significance.

The panel also suggested a clearer distinction between the two components of economic capital — realised equity and revaluation balances — mainly because of the volatile nature of the revaluation balances.

“The committee was of the view that given the inclusion of the revaluation balances in the RBI’s overall risk buffers, measures to address volatility will have to be introduced,” the report said.

The committee observed that even if the RBI’s economic capital could appear to be relatively higher, it is largely on account of the revaluation balances which are determined by exogenous factors such as market prices and the central bank’s discharge of its public policy objectives.

Going forward, the Jalan panel said that the financial resilience of the RBI may be articulated by the central board in terms of the risk protection desired for its balance sheet.

Dual sets of targets

So far as the surplus distribution policy for the future is concerned, the panel said it should move away from targeting total economic capital alone, to one where it has a dual set of targets, that is, the total economic capital of the RBI and the level at which realised equity is to be maintained.

“The committee recommends that the minimum level of realised equity to be maintained should be the sum of the monetary and financial stability risks, credit risk and operational risk,” the report said.

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