RBI's excess capital should fund PSU banks, ARC: Survey

RBI is one of the highly capitalised central banks of the world and the government can redeploy some of its capital for fund infusion in state-owned banks and setting up a public sector asset reconstruction company, Economic Survey 2016-17 said.
"The key principle that should be observed in this process is that the excess capital in the RBI, including that created by demonetisation, is a balance sheet or wealth gain and not an income gain. Hence, the uses to which this is put should be of a balance sheet nature," according to the Survey tabled in Parliament today.
Observing that there is no particular reason why this extra capital should be kept with the RBI, it said it is one of the most highly capitalised central banks in the world.

Even at current levels, the RBI is already exceptionally highly capitalised and so, it would seem to be more productive to redeploy some of this capital in other ways, the Survey added.
"Assuming that the RBI returns Rs 4 lakh crore of capital to the government, what are the uses to which this capital can be put? It could be used in several good ways...First for recapitalizing the banks and/or recapitalizing a Public Sector Asset Rehabilitation Agency (PARA)," it said.
Second, for extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position.

Talking about global precedents for governments using

their capital in the central bank for their own purposes, the survey said the US Federal Reserve gave USD 19 billion from its surplus capital to finance transportation projects in 2015.
In 2004, the Bundesbank extinguished its old Deutsche Mark currency and counted it as income in the profit and loss account because it was deemed highly unlikely that these would ever be exchanged for euros, the survey said, pointing to the benefit from the extinguishing of bank notes.
Highlighting economic objections to the use of excess capital of RBI by the government, it said the central bank also faces risks to its balance sheet from interest rate changes.

"If interest rates increase, the value of its government bond holdings will decline, inflicting valuation losses. However, risks from interest rate increases are quantitatively less important for the RBI given the composition of its assets. Moreover, these risks will, in general, be negatively correlated with exchange rate risks," it said.
Besides, there is concern on capital loss, it said, adding that valuation losses will arise when the rupee appreciates.