Reserve Bank of India (RBI) has approved the transfer of record Rs 1.76 lakh crore dividend and surplus reserves to the government. The excess reserve transfer is in line with the recommendation of former RBI governor Bimal Jalan-led panel constituted to decide size of capital reserves that the central bank should hold.

Body:

The Bimal Jalan panel, which was set up to examine the Reserve Bank of India’s (RBI) economic capital framework (ECF), would recommend the transfer of the central bank’s excess reserves to the government over a period of three-five years

RBI economic capital framework:

• Economic capital framework refers to the risk capital required by the central bank while taking into account different risks.
• The economic capital framework reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
• The framework the government is talking about is basically about how much capital RBI needs for its operations and how much of the surplus it should pass on to the government.

Suggestions of Bimal Jalan committee:

• The panel recommended a clear distinction between the two components of the economic capital of RBI i.e. Realized equity and Revaluation balances.
• Revaluation reserves comprise of periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.
• Realized equity, which is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings. It is also called the Contingent Risk Buffer (CBR).
• The Jalan committee has given a range of 5.5-6.5% of RBI’s balance sheet for Contingent Risk Buffer.
• Adhering to the recommendations, the RBI has decided to set the CBR level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth ?52,637 crore to the government.
• If CBR is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government.
• However keeping CBR at a lower range of 5.5% will reduce RBI’s space to manoeuvre monetary policy.

Conclusion:

The committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved.