The Central Board of the Reserve Bank of India (RBI) Monday decided to transfer a surplus of Rs 1.76 lakh crore to the exchequer, nearly double the estimated Rs 90,000 crore in the Budget for 2019-20. The move could enable the government kick-start a much needed public spending push, alongside possibly paring of the fiscal deficit, estimated at 3.3 per cent of the GDP.
The transfer includes Rs 1.23 lakh crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified under a revised Economic Capital Framework (ECF) adopted by the RBI board. The transferred amount is over three times the five-year average of Rs 53,000 crore.
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, he 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.
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).
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This helped the RBI to write back excess risk provisions of Rs 52,637 crore. The committee, under former RBI Governor Bimal Jalan, recommended the realized equity level to be kept within a band of 6.5-5.5 per cent. At the upper band of 6.5 per cent, excess of risk provisioning would have been Rs 11,608 crore.
The Central Board accepted all the recommendations of the Committee and finalised the RBI’s accounts for 2018-19 using the revised framework to determine risk provisioning and surplus transfer, the RBI said in a statement Monday. “As on June 30, 2019, the RBI stands as a central bank with one of the highest levels of financial resilience globally,” the statement said.
Jalan was named chairman of the six-member committee on ECF on December 27, 2018, two weeks after Shaktikanta Das assumed charge as the new Governor in place of Patel.
Former RBI Deputy Governor Rakesh Mohan, who was against transferring a higher surplus to the government, is the Vice Chairman of the committee. One of the contentious issues in the conflict between the government and the RBI under Patel was the size of the central bank’s reserves, which at Rs 9.6 lakh crore was then perceived as being excessive by the government.
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Raghuram Rajan and Urjit Patel had cautioned against transfer of excess reserves saying this would hit the RBI’s ratings and increase its borrowing cost. The RBI, under Shaktikanta Das, believes its reserves are sufficient, the amount isn’t big — and this is the push the economy needs.
According to the RBI, while the revised framework technically would allow the RBI’s economic capital levels as on June 30, 2019 to lie within the range of 24.5 per cent to 20 per cent of balance sheet (depending on the level of realized equity maintained and availability of revaluation balances), the economic capital as on June 30, 2019 stood at 23.3 per cent of balance sheet.
As financial resilience was within the desired range, the entire net income of Rs 1,23,414 crore for 2018-19, of which an amount of Rs 28,000 crore has already been paid as interim dividend, will be transferred to the government. “This is in addition to the Rs 52,637 crore of excess risk provisions which has been written back and consequently will be transferred to the Government,” the RBI said.
Former Finance Secretary S C Garg, who was a member of the Jalan panel before he was shifted as Power Secretary, had submitted dissenting views on its recommendations after it was clear that the review of the ECF would result in lower-than-expected transfer of surplus to the government. He reportedly had reservations on the methodology endorsed by other members to arrive at the size of the surplus, and also wanted the entire transfer in one go.
New finance secretary Rajiv Kumar, who replaced Garg on the Jalan panel, took part in the deliberations before the panel arrived at a final decision. “There was no dissent in the final report,” said Rakesh Mohan to CNBC.
The Central Board meeting which cleared the Jalan panel report was chaired by Governor Das. Apart from Deputy Governors and independent directors, Rajiv Kumar and Economic Affairs Secretary Atanu Chakraborty were also present. The board also reviewed the current economic situation, global and domestic challenges and various areas of RBI’s operations. It also approved the Annual Report of the Reserve Bank for the year 2018-19.