Govt wants RBI to frame dividend policy; to amend RBI Act

The government is nudging the Reserve Bank of India (RBI) to formalise a policy governing the yearly dividends it pays to the Centre. 

Any such policy is likely to be given statutory backing through amendments in the RBI Act. 

This moves comes in the wake of differences between North Block and Mint Road over the dividend that the Centre received from the RBI in 2017-18.

A senior government official said that the government’s nominees to the RBI board – economic affairs Secretary Subhash Garg and financial services secretary Rajiv Kumar – will take this issue up in the next RBI board meeting. 

The planned amendments to the RBI Act will mandate the central bank to transfer a certain portion of its annual profits after making provisions for bad debt, depreciation, and other items. RBI’s views on the matter are being sought, the official said. Unlike the Centre’s April-March calendar, the RBI follows the July-June financial year.

For its financial year 2016-17, the RBI had transferred Rs 306 billion of its surplus to the government, less than half of the Rs 659 billion it transferred a year earlier. In the Union Budget for 2017-18, the government had received a dividend of Rs 749 billion from the RBI and other nationalised banks. Of this, the RBI’s share was expected to be Rs 580 billion.

The Centre asked RBI for an additional Rs 130 billion to take the total surplus received for the year to Rs 430 billion. Throughout the latter half of 2017-18, finance ministry officials remained confident that the amount would be transferred, even as they battled with the prospect of a missed fiscal deficit target in a year which saw disruption due to the implementation of the goods and services tax.

The RBI had held out Rs 130 billion for its contingency reserves. However, on March 27, four days before the end of fiscal year 2017-18, it transferred Rs 100 billion extra to the government. 

Partly from lower dividends from state-owned banks and other enterprises, and a number of other reasons, the fiscal deficit target for FY18 was revised from 3.2 per cent of the gross domestic product to 3.5 per cent. Total dividend receipts from state-owned banks and enterprises was revised downwards to Rs 1.06 trillion from Rs 1.42 trillion.

There has been extensive debate in the past over the RBI’s dividend policy. In 2013, a panel led by RBI board member YH Malegam had questioned the adequacy of reserves held by the central bank. It had recommended that the contingency reserves held by the RBI be built up.

More recently, in its annual report for 2015-16, the RBI had said it had prepared a “draft economic capital/provisioning framework to assess its risk-buffer requirements in a structured and systematic manner.” This framework was to be used for determining the surplus transferable each year by the RBI to the Centre.

• Govt asks RBI to firm up dividend policy
• Govt seeks to amend RBI Act to provide legal backing to proposal
• If amendments push through, RBI will be bound to pay above a certain amount every year
• Govt’s nominees to RBI board to take up issue in  next meeting
• In 2017-18, differences rose between the two on the surplus paid