In a move that will help the Centre bridge its fiscal deficit, the Central Board of the Reserve Bank of India on Monday decided to transfer a staggering ₹1,76,051 crore as surplus transfer to the government for 2018-19.
This amount is also much more than what the government is expecting (₹1,05,000 crore) via disinvestment in FY20.
This is the biggest-ever payout by the central bank. The central bank had transferred ₹50,000 crore in 2017-18. The RBI’s balance sheet size as at June-end 2019 stood at ₹9,57,036 crore.
The surplus transfer includes ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), which was recommended by the Bimal Jalan Committee and adopted at the Central Board’s meeting.
The move will buoy the government’s non-tax revenues at a time when tax collections have been subdued due to an economic slowdown. Top RBI officials had recently raised concerns about transferring such a huge amount from the reserves to the national exchequer. Former Deputy Governor Viral Acharya, in a speech in October 2018, had flagged as thorny the issue of transfer of excess reserves to the government.
Acharya had warned: “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution……”
Former RBI Governor D Subbarao too had said recently that “raiding” the reserves of the central bank showed the “desperation” of a government.
Using the revised ECF to determine risk provisioning and surplus transfer (premised on maintaining the realised equity level at 5.5 per cent of the balance sheet), the excess risk provisions worked out to ₹52,637 crore, which was written back.
Contingent Risk Buffer
The realised equity could be used for meeting all risks/losses as it is primarily built up from retained earnings. It is also required to cover credit risk and operational risk. This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB). This has been recommended to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet.
“Given that the available realised equity stood at 6.8 per cent of balance sheet, while the requirement recommended by the Committee was 6.5 per cent to 5.5 per cent of the balance sheet, there was excess of risk provisioning to the extent of ₹11,608 crore at the upper bound of the CRB and ₹52,637 crore at the lower bound of the CRB. The Central Board decided to maintain the realised equity level at 5.5 per cent of the balance sheet and the resultant excess risk provisions of ₹52,637 crore were written back,” the board said. 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 20.0 per cent of the balance sheet, the economic capital as on June 30, 2019 stood at 23.3 per cent of the balance sheet.