Economics Current

RBI to transfer 1.76 lakh crore to the govt

In News Recently, a board led by The Reserve Bank of India Governor, Shaktikant Das gave nod to transfer the government the sum of about Rs. 1,76,051 crore which comprises 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). What's Excess Risk Provision of Rs. 52,637 crore? Rs. 52,637 crore is the excess risk provision from Contingency Fund maintained by the RBI. The Reserve Bank normally maintains the Contingency Fund at 6.8 percent of its Balance Sheet. But, as per the Bimal Jalan Committee’s recommendations, this fund should be between 5.5 to 6.5 percent mark of the Balance Sheet. So, the RBI decided to maintain the Contingency Fund at 5.5 percent and the excess risk provisions of the above amount (Rs.52,367 crore) were written back/transferred to the Government of India. Background The excess reserve transfer is done in acceptance of the recommendation of former RBI governor Bimal Jalan-led panel. It was constituted to recommend the size of capital reserves that the RBI should hold. Finance Secretary, Rajiv Kumar, represented the central government in the panel. Types of Reserves – The RBI maintains The RBI’s reserves consist of: •Currency and Gold Revaluation Account (CGRA)- The CGRA makes up the chunk of the reserves which essentially reflects the unrealized losses or gains on the revaluation of forex and gold. •The Investment Revaluation Account (IRA)- is sub-divided into IRA-foreign securities and IRA-rupee securities. The former reflects the unrealized gain or loss on the mark-to-market of foreign securities while the latter is on account of marking rupee securities. •The Asset Development Fund (ADF)- has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions. •The Contingency Fund (CF)- constitutes over a fourth of the RBI’s reserves. It is a specific provision made for meeting unexpected contingencies from monetary policy decisions and exchange rate operations. RBI Surplus The RBI surplus reflects the revenue that the apex bank has earned on its assets after deducting expenses. The surplus represents the amount RBI transfers to the Central Government. The RBI isn’t a commercial organization like the banks or other companies, so does not pay a dividend. The RBI statute provides an exemption from paying income-tax or any other tax. The apex bank, therefore, transfers the “surplus”, i.e., income minus expenditure, to the government, in accordance with Section 47 of the Reserve Bank of India Act, 1934. How RBI earns Profits The RBI earns profit from the following functions: •Managing the borrowings of the Government of India and of state governments •Supervision or Regulation of banks and non-banking finance companies. •Managing the currency and payment systems Sources of RBI earnings The central bank’s income comes from: •The earnings on its foreign currency assets, which could be in the form of top-rated securities or bonds and treasury bills of other central banks. •Deposits with other central banks. •The RBI also earns interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight. •It also takes a management commission on handling the borrowings of central and state governments. About Bimal Jalan Committee In December 2018, the RBI set up a committee on the economic capital framework (ECF), headed by former RBI governor Bimal Jalan and consisted of five other members in the panel. It was constituted at a time when the central bank and the government were at loggerheads on the issue of RBI’s surplus transfer to the government. Concerns 5.5 percent level for the CF (as against the upper end of 6.5 percent) is the lowest level that the RBI has maintained. This lowers the RBI’s flexibility to maneuver in the future. The manner in which the transferred funds will be used is critical. The bulk of government spending is generally biased towards boosting consumption rather than investments. The Centre needs to put the RBI’s surplus funds to productive use.
Source: Hindu Business line



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