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RBI to transfer surplus of Rs 1.76 lakh crore to the government as per Bimal Jalan Committee recommendation

The Bimal Jalan Committee was formed to resolve a flashpoint between the central government and the central bank on the capital requirement of RBI

The Reserve Bank of India has decided to transfer an amount of ₹1,76,051 crore to the Government of India. The central bank took this decision by accepting the recommendations of Bimal Jalan Committee on surplus transfer to the government.

The ₹1.76 lakh crore to be transferred consists of ₹1,23,414 crore of surplus for the year 2018-19 and ₹52,637 crore of excess provisions, which were identified as per the revised Economic Capital Framework (ECF) adopted at a meeting of the Central Board of the bank today.

A statement issued by RBI said that “the Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world”.

The Bimal Jalan Committee has recommended that a clearer distinction between the two components of economic capital, realized equity and revaluation balances, should be maintained. They said 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.

The Committee says that RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’ (a monetary/ 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. The committee has recommended that a Contingent Risk Buffer (CRB) should be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.

The committee also recommended a surplus distribution policy, saying that if the realized equity of RBI is above the minimum required level, the entire net income would be transferable to the Government. On the other hand, if it is below the required level, risk provisioning will be made to the extent necessary and only the residual net income (if any) will be transferred to the Government.

The Bimal Jalan Committee was formed to resolve a flashpoint between the central government and the central bank. The government was of the view that RBI was sitting on too much capital which should be transferred to the government, while some officials of the bank didn’t agree with the same. In December, both the RBI had agreed to form a committee to review the capital framework of the bank. The committee was headed by former RBI governor Bimal Jalan, and it included former RBI Deputy Governor Rakesh Mohan, central board members Bharat Doshi and Sudhir Mankad, Economic Affairs Secretary Subhash Chandra Garg and RBI Deputy Governor NS Vishwanathan.

The committee reviewed the capital requirement of the bank for various provisions, reserves and buffers needed to be held by RBI, and transfer of any excess fund to the government.

As the current realised equity of the central bank is 6.8%, which is above the recommended level of 5.5-6.5%, there was an excess amount for risk provision to the extent of ₹52,637 crore at the lower limit and ₹11,608 crore at the upper limit. The RBI decided to maintain the realised equity at 5.5% level, and the excess amount was written back.

On the other hand, the central bank’s net income for the year 2018-19 was ₹1,23,414, and as its financial resilience is well within the desired limit, it was decided to be transferred to the union government. ₹28,000 crore from this amount has already been paid as interim dividend.

As a result, a total of ₹1,76,051 crore will be transferred to the government.

The statement said that as on 30 June, the Reserve Bank of India stands as a central bank with one of the highest levels of financial resilience globally. This observation proves that the government was correct in assessing the financial status of RBI.

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