- Context: The Reserve Bank of India has decided to transfer a sum of Rs. 1, 76,051 crores to the Government of India as per the recommendations made by Bimal Jalan Committee.
About the committee:
- RBI constituted a panel on the economic capital framework. It was headed by Ex-RBI governor Bimal Jalan.
- The committee was composed of Former RBI Governor Bimal Jalan (Chairman), Former Deputy Governor of RBI Rakesh Mohan (deputy chairman), Economic Affairs Secretary Subash Chandra Garg (member), RBI Deputy Governor N.S. Vishwanathan (member), and RBI board member Bharat Doshi (member), RBI board member Sudhir Mankad (member).
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The economic capital framework reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
Need of the committee
- The central government was sure that RBI is sitting on much higher reserves than it actually needs to tide over financial emergencies.
- There are examples of some central banks around the world (like the US and UK) keep 13% to 14% of their assets as a reserve compared to RBI’s 27%.
- The government and the central bank were at loggerheads over other issues including relaxation of prompt corrective action norms on weak banks, special liquidity window for Non-Banking Financial Companies (NBFC).
- The RBI Act makes it clear that all the profits of the Reserve Bank must be transferred to the government. However, the issue is what are the profits based on the accounting method used.
Tasks to be done by the committee:
- To review the status of reserves and buffers presently provided for by the RBI
- To propose a suitable profits distribution policy taking into account all the likely situations of the RBI
- To review best practices followed by the central banks globally in making assessment and provisions for risks
- To suggest an adequate level of risk provisioning that the RBI needs to maintain
Recent recommendations made by the committee:
- The Committee has made a recommendation to constitute a surplus distribution policy which will target the level of realized equity to be maintained by the RBI
- If the committee will found equity is above its requirement, will the entire net income be transferable to the Government
- If it will be below the lower bound of requirement, the government will apply risk provisions to the extent necessary and only the residual net income transferred to the Government
Benefits of the recent move of RBI:
- The government is set to get a dividend of Rs 95,414 crore during the current financial year. This will be in addition to a surplus fund of 1.76 lakh crore
- It will allow the government to meet deficit targets, infuse capital into weak banks to boost lending and fund welfare programmes
- The government will be able to help the banks with this fund. Union Finance Minister Nirmala Sitharaman has already announced a capital infusion of Rs 70 thousand crores in public sector banks, which is expected to fetch Rs 5 lakh crore in the market
- With tax revenues falling short of expectations, any off-budget receipts from the RBI will be of great help to the central government
- The latest move of the RBI will provide flexibility to the bank to match with its public policy objectives. It will be helpful in maintaining above the level coordination with peer central banks. It will present a great image of India as one of the fastest-growing large economies of the world.
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