Acceptance of Jalan committee recommendations, revised Economic Capital Framework opened the window
GN Bureau | August 27, 2019
The central board of the Reserve Bank of India (RBI) has decided to transfer Rs 1,76,051 crore to the government, ending a long debate and opening new options for injecting fresh money into the economy.
The RBI central board on Monday adopted the revised Economic Capital Framework (ECF), under which the amount – comprising of Rs 1,23,414 crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions – will be transferred to the centre.
Here is how this happened:
* The RBI, in consultation with the government of India, had constituted an Expert Committee to Review the Extant Economic Capital Framework, under the chairmanship of its former governor, Dr. Bimal Jalan. The committee later submitted its report to the RBI governor. Its recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved.
* The committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.
* The central board, in its 578th meeting chaired by governor Shaktikanta Das, accepted all the recommendations and finalized the RBI’s accounts for 2018-19 using the revised framework to determine risk provisioning and surplus transfer. The implications of this decision are:
(i) Realized Equity:
As the available realized equity stood at 6.8 percent of balance sheet, while the requirement recommended by the committee was 6.5 percent to 5.5 percent, there was excess of risk provisioning to the extent of Rs 11,608 crore at the upper bound of CRB and Rs 52,637 crore at the lower bound of CRB. The central board decided to maintain the realized equity level at 5.5 per cent of balance sheet and the resultant excess risk provisions of Rs 52,637 crore were written back.
(ii) Economic capital levels:
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 percent to 20.0 percent 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 percent of balance sheet. As financial resilience was within the desired range, the entire net income of Rs 1,23,414 crore for the year 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.
* As on June 30, the RBI stands as a central bank with one of the highest levels of financial resilience globally, it said in a statement. The central board also reviewed the current economic situation, global and domestic challenges and various areas of operations of the RBI.
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