Consensus eludes RBI-appointed Jalan panel on economic capital framework

The Reserve Bank of India (RBI)-appointed committee to review the economic capital framework of the central bank failed to arrive at a consensus during a meeting held here on Wednesday, leading to a delay in finalising its report, a top official said.

The six-member committee headed by former RBI governor Bimal Jalan decided to meet once again before submitting its report by the end of this month.

“There may be differences of opinion (among the panel members), but that’s being discussed,” an official aware of the development said, requesting anonymity.

The committee, formed in December 2018, was supposed to submit its report by April 8, 2019, but it was later given a three-month extension. One of the key mandates of the committee was to determine the level of surplus that the RBI should hold.

Wednesday’s meet was supposed to be the last one for the panel. However, there will be at least one more round of meeting to be held later this month. The main difference of opinion has arisen between the panel members and the government’s representative on the panel — Economic Affairs Secretary S C Garg — over the transfer of the RBI’s ‘excess’ capital reserves, according to a source close to the central bank.

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 voiced by Garg is for a one-time transfer, the source said.

The government is of the view that the capital reserves held by the RBI are among the highest in the world “and is not being put to good use”, former Finance Minister Piyush Goyal had said in December. 

Goyal had also opined that the “excess” capital of the RBI could have been used “to support the banks just as was done in USA during the financial crisis.”

Usually, the RBI, which follows a July-June calendar, transfers dividend to the central government after closing its accounts in August. While transferring the dividend, the central bank keeps a share of surplus towards various risks and reserves every year, according to its economic capital framework.

The RBI needs adequate capital reserves for monetary policy operations, currency fluctuations, possible fall in value of bonds, sterilisation costs related to open-market operations, credit risks arising from the lender of last resort function and other risks from unexpected increase in its expenditure.

The RBI has maintained the view that it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.
 

Capital transfer from the RBI to the government also assumes importance in the wake of dwindling tax collections and the government's desire to keep the fiscal deficit at 3.4 per cent of GDP in the Budget, the same level as was pegged in interim Budget for FY20. 

Expert committee’s mandate
 

| To review status, need and justification of various reserves and buffers maintained by RBI

| Review global best practices followed by central banks in making provisions for risks

| Suggest adequate level of risk provisioning that RBI needs to maintain

| Determine whether RBI is holding provisions, reserves and buffers in surplus or deficit

| Propose suitable profits distribution policy