Even as the Reserve Bank of India Monday announced that it would transfer a record Rs 1.76 lakh crore to the government, the Central government’s nominee member on the committee tasked with reviewing RBI’s economic capital framework had sought additional funds to the tune of 1.5 percentage points of the RBI’s balance sheet (or roughly Rs 54,255 crore).
This demand for adopting a higher risk tolerance range, which could have resulted in even higher transfer to the government, was turned down by the committee headed by former RBI Governor Bimal Jalan.
As per the Committee’s report released by the RBI Tuesday — a day after the RBI Central Board accepted all its recommendations — Finance Secretary Rajiv Kumar had proposed that “the provision for monetary and financial stability risk may be maintained at 3 per cent” of the RBI’s balance sheet as against the “safe range” of 4.5 per cent to 5.5 per cent recommended by the Committee.
The Central government had nominated Kumar as a member of the Jalan Committee on July 30 after former Finance Secretary Subhash Chandra Garg was moved to the Power Ministry.
Kumar said the rare risks flagged by the committee were highly unlikely. “Rajiv Kumar recalled and raised the issue flagged earlier that the stress scenario of substantial yield hardening and significant rupee appreciation over one year is not highly likely and therefore, risk tolerance range may be higher or, alternatively, trigger for realised equity to meet shortfall may be lower,” according to the Committee’s report.
“Rajiv Kumar recalled the issue raised earlier regarding other central banks providing extensive liquidity support 2008 onwards without setting aside capital for ELA/LoLR (Emergency Liquidity Assistance/Lender of Last Resort) for financial stability risk and proposed that the provision for monetary and financial stability risk may be maintained at 3 per cent (as against 4.5%-5.5% recommended by the Committee),” as per the report.
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Had the committee accepted the proposal of the Finance Secretary, RBI would have had to part with additional excess capital of Rs 54,255 crore.
The RBI’s transfer of Rs 1,76,501 crore to the government comprised of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board on Monday. The transferred amount is over three times the five-year average of Rs 53,000 crore.
As of June 2018 the RBI Balance Sheet size stood at Rs 36.17 lakh crore and a reduced provision requirement of 3 per cent (as proposed by Rajiv Kumar) as against committee’s final recommendation of 4.5-5.5 per cent, would have meant that the government would have received additional Rs 54,255 crore.
The committee, however, in its recommendation said, “The Committee was of the view that given the importance of these risk provisions, their size should be appropriate to meet a relatively adverse financial stability shock, while ensuring the same is not excessive. The Committee recommends that the size of the monetary and financial stability risk provisions should be maintained between 4.5 to 5.5 per cent of the balance sheet.”
One of the many issues of friction between the government and the central bank was the transfer of higher surplus during the tenure of Urjit Patel as RBI Governor. In fact, Patel quit RBI on December 10 last year, three weeks after the RBI board agreed to set up a committee to thrash out a new framework under his governorship.
Playing it safe
The Government nominee, Rajiv Kumar, said that risks flagged by the Jalan committee were unlikely. However, the committee played it safe. Citing the possibility of an adverse financial stability shock, it kept risk band at 4.5-5.5%.
But even before this, Patel’s relations with the government had soured following the latter’s unprecedented decision to invoke Section 7 of the RBI Act allowing the Centre to issue directions to the RBI board. To arrive at the surplus amount, the Central Board decided to maintain the realized equity level at 5.5 per cent of the balance sheet as against the existing 6.8 per cent (as on June 30, 2019).
The Jalan committee also recommended that the RBI accounting year (July to June) may be brought in sync with the fiscal year (April to March) from the financial year 2020-21. It further suggested that the Economic Capital framework may be periodically reviewed every five years.