With the stage set for Raghuram Rajan’s exit and appointment of a new RBI Governor, the government is bringing to the table a proposal to utilise a part of the central bank’s “excess capital” to infuse money into state-owned banks or create a state-owned ‘bad bank’.
According to top government officials, even if Rs 4 lakh crore of RBI’s existing capital is redeployed into state-owned banks, the central bank should still be well-capitalised at 19 per cent of its assets. “Why shouldn’t the RBI suggest this on its own?” an official said.
The proposal states, “RBI’s capital could be used in two ways. It could be injected directly into PSBs which will give them financial room to accept losses on bad assets and continue lending. Alternatively, funds could be used to create a ‘bad bank’ that would be used for resolving bad loans, thereby forcing PSBs to focus on their normal commercial activities.”
The proposal states that RBI can also transfer the desired level of equity to the government which in turn uses it to recapitalise state-owned banks.
The idea was first floated by Chief Economic Advisor Arvind Subramanian in the Economic Survey for 2016-17. To address the problem of highly-leveraged corporate houses and non-performing assets of public sector banks, referred to as the ‘twin balance sheet (TBS) challenge’ by the Survey, Subramaniam pointed to the RBI’s capital as one possible source for resources.
At present, RBI’s capital size at 31.5 per cent of its assets (or balance sheet) is second only to Norway at 40 per cent, the highest among global central banks. If the RBI agrees to set aside Rs 2 lakh crore for bank recapitalisation, its own capital will still be 25 per cent of its assets. The median level of capital in a sample of central banks of 37 countries is 11 per cent of the balance sheet size.
The RBI had not been forthcoming about utilising its capital for purposes like these, given the high risks it takes on account of fluctuating foreign exchange and changes in domestic interest rates. In fact, over the last couple of years, the RBI has been adding very little to its reserves and instead transferring higher amounts as dividends to the government. This was at the insistence of the Finance Ministry which had been pointing out to the RBI that its reserves were fairly substantial and did not need to be beefed up further.
Accordingly, in 2013-14 and 2014-15, the RBI transferred surpluses of Rs 52,679 crore and Rs 65,896 crore, respectively, to the government compared with just Rs 15,009 crore in 2010-11.
In the Economic Survey, Subramaniam, however, emphasised that any such move would need to be initiated jointly and cooperatively between the government and the RBI. “It will also be critical to ensure that any redeployment of capital would preserve the RBI’s independence, integrity, and financial soundness — and be seen to do so,” he noted in the Survey.