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Tag:GS3 || Economy || Banking and financial sector || RBI
Why in news ?
- The Reserve Bank of India (RBI)-appointed committee to review the economic capital framework of the central bank has failed to arrive at a consensus during a recently held meeting leading to a delay in finalising its report.
Difference of opinion:
- The main difference of opinion has arisen between the panel members and the government’s representative on the panel over the transfer of the RBI’s ‘excess’ capital reserves.
- While most panel members were in favour of a phased transfer of the RBI’s capital reserves to the government over the years, the government’s view is for a one-time transfer.
- RBI had constituted a panel on economic capital framework. It was headed by Ex-RBI governor Bimal Jalan.
- The expert panel on RBI’s economic capital framework was formed to address the issue of RBI reserves—one of the sticking points between the central bank and the government.
What’s the isssue?
- The government has been insisting that the central bank hand over its surplus reserves amid a shortfall in revenue collections.
- Access to the funds will allow the government to meet deficit targets, infuse capital into weak banks to boost lending and fund welfare programmes.
What is economic capital framework?
- Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The economic capital framework reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
Why this committee?
- When Mr. Urjit Patel was the governor of RBI, he declined requests from the central government for an additional payment from the Contingency Reserve after the dividend pay-out dropped from Rs 65,896 crore in FY 2015-16 to Rs 30,659 crore in FY 2016-17.
- Hence the Committee was set up in December 2018 following discussions between the finance ministry and the RBI about the manner in which the central banks’ surplus can be shared with the government.
Why RBI transfer funds to govt.?
- RBI was formed as a private shareholders’ bank in 1935.
- But government nationalised RBI in January 1949 and thus become the sole owner.
- Thus in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934, RBI transfer the “surplus” — (i.e. the excess of income over expenditure) to the government.
RBI’S reserves :
- RBI has seen a manifold rise in its surplus funds after a surge in its revaluation reserves from Rs 1.99 lakh crore in FY09 to Rs 6.922 lakh crore in FY18.
Reserves of central bank of other countries :
- Central banks of US and UK keep 13% to 14% of their assets as a reserve.
- Whereas RBI keep around 27% as reserve.
- Some country’s central bank such as Russia keep even more than 27%.
Experts view in RBI’s Reserve :
- Many economists and expert committees have in the past argued that the 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 “already exceptionally highly capitalized” and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalizing the banks.
What is RBI’s view on excess reserves?
- The RBI has maintained the view that it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.
What govt. will do with the excess capital from RBI?
- Government can use the capital transfer for recapitalization of public sector banks which is facing huge problem of NPA.
- As the revenue collected from GST is not as per expectation, the capital from RBI can also be used to meet the fiscal deficit target of 3%.
Way forward :
- RBI’s autonomy is of utmost important in the setting of interest rates or in the regulation of banks or in other operational spheres.
- The whole system should be institutionalized for the sharing of RBI’s surpluses.