A Committee set up to recommend the appropriate economic capital framework for the Reserve Bank of India (RBI) has recommended transfer of excess capital from the central bank to the government over a period of 3-5 years, a senior official said.
The committee, which finalised its report at a meeting held in the Capital on Wednesday, has also recommended the framework should be reviewed periodically. The report of the Committee, headed by former RBI Governor Bimal Jalan, will be submitted to the central bank “very soon”. The report is expected to reflect differences among the panel members over treatment of the RBI’s excess reserves.
There are differences among panel members on the issue of transferring past reserves including unrealised gains in gold and currency revaluation accounts. Sources said that most committee members favoured reduction in the RBI’s excess reserves in phased manner over 3-5 years, without any substantial additional annual transfer to the government. It is not immediately clear how much excess capital has the committee identified that can be shared with the government.
There are differences between government nominee member on the committee, Finance Secretary Subhash Chandra Garg, and other panel members, it is learnt. Set up last December, the Committee was expected to submit its report by April, within 90 days of its first meeting.
Recommendations of panel critical in resolving the issue
The much awaited report of the Committee on recommending the appropriate economic capital framework for the RBI was finalised Wednesday. It has recommended gradual transfer of any excess capital with the RBI to the government over a period of 3-5 years, along with the provision to review the framework periodically. While RBI is yet to release the panel’s report, its recommendations will be critical in resolving this issue which had led to a heated discussion between the government and the Reserve Bank of India last year.
The panel was set up following discussions between the finance ministry and the RBI last year over the manner in which the central bank’s surplus can be shared with the government.
While the Committee is chaired by Jalan, former RBI Deputy Governor Rakesh Mohan — who is against transferring a higher surplus to the government — is its Vice Chairman. Alongside Garg, RBI Deputy Governor NS Vishwanathan, RBI Central Board Members Bharat Doshi and Sudhir Mankad are other members of the panel.
The Committee was set up to “review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI; and (to) review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.”
Prior to setting up of the Committee, the finance ministry in its discussions with the RBI, had argued that the existing economic capital framework — which governs the RBI’s capital requirements and terms for the transfer of its reserves to the government — is based on a very “conservative” assessment of risk by the central bank. The ministry has internally estimated RBI’s excess reserves at Rs 3.6 lakh crore.
As per Section 47 of the RBI Act, profits of RBI are to be transferred to the government, after making various contingency provisions, public policy mandate of RBI, including financial stability considerations. For the year ending June 2018, RBI had total reserves of Rs 9.59 lakh crore, comprising mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore). Many economists and expert committees have in the past argued that RBI is holding much higher capital that required to cover all its risks and contingencies. Former Chief Economic Adviser Arvind Subramanian said in Economic Survey 2016-17 that the RBI is “is already exceptionally highly capitalised” and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency. This proposal was opposed by the then RBI Governor Raghuram Rajan.