The central board of the Reserve Bank of India on Monday approved a transfer of Rs 1.76 lakh crores surplus to the government as dividend, the highest ever dividend doled out by the central bank in its history.
In a press release, the RBI said, “The Central Board of the Reserve Bank of India (RBI) today decided to transfer a sum of Rs 1,76,051 crore to the Government comprising of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board today.”
The entire net income of Rs 1,23,414 crore for the year 2018-19, includes Rs 28,000 crore that has already been paid by RBI as interim dividend. Therefore, the total dividend transfer to the government would amount to Rs 1,48,051 crores.
RBI had transferred a dividend of Rs 52,679 crores to the central government for FY 2017-18.
The board of RBI has accepted all the recommendations of the Bimal Jalan panel on Economic Capital Framework, and finalised the accounts for FY19 using the revised framework to determine the surplus transfer.
The Jalan panel has recommended 5.5-6.5 percent as contingency reserves of RBI's total assets. This includes 5.5-4.5 percent for monetary and financial stability risks and 1 percent for credit and operational risks. Right now it is 6.8 percent. After the surplus transfer this will come down to 5.5 percent.
Major Recommendations of the Jalan Committee:
* The committee recommended a clearer distinction between the two components of economic capital- i.e. realized equity and revaluation balances. The committee felt that the realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings, while revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealised valuation gains and hence were not distributable.
While the current level of RBI’s realised equity stands at 6.8 percent, the committee has recommended 6.5 per cent to 5.5 per cent of balance sheet as the ideal level. “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 ₹ 52,637 crore were written back”, the statement said.
* The Committee has recommended the adoption of Expected Shortfall (ES) methodology for measuring the RBI’s market risk on which there was growing consensus among central banks as well as commercial banks over the recent years. “While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the Committee has recommended the adoption of a target of ES 99.5 percent CL keeping in view the macroeconomic stability requirements. In view of the cyclical volatility of the RBI’s revaluation balances, a downward risk tolerance limit (RTL) of 97.5 per cent CL has also been articulated. Both levels were stress-tested for their adequacy by the Committee,” RBI’s press note read.
* The Jalan committee also recommended that the risk provisioning made primarily from retained earnings- referred to as the Contingent Risk Buffer (CRB)- to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.
* The Committee has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital vis-à-vis the earlier policy which targeted total economic capital level alone. Only if realized equity is above its requirement, will the entire net income be transferable to the Government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government.
RBI union warns of surplus capital transfer risks
Former RBI deputy Governor and member of the Jalan panel, Rakesh Mohan told CNBC-TV18, "Public discussion, economic survey has all been concentrated on liabilities side of the balance sheet so far. For the last 10 years, net foreign assets have varied between 60-90 percent. In no way can one think of forex reserves being higher than what they ought to be."
He added, "There was no dissent in the final Jalan committee report."The Reserve Bank follows a July-June financial year and the dividend is distributed in August after annual accounts are finalised.