Mumbai: A Reserve Bank of India panel, led by former governor Bimal Jalan, has recommended that the central bank pay interim dividend to the government, a practice that started in 2016-17, only under exceptional circumstances.
All the recommendations of the panel, set up to study the central bank’s economic capital framework, were accepted by RBI’s central board on Monday, although the report was published on Tuesday.
The Jalan committee has also recommended that RBI’s capital framework be reviewed every five years and its accounting year (July-June) be aligned with the fiscal year that ends on 31 March.
“The committee recommends that the framework may be periodically reviewed every five years. Nevertheless, if there is a significant change in the RBI’s risks and operating environment, an intermediate review may be considered," the committee said in its report.
The Jalan panel recommended a surplus distribution policy, which targets the level of realized equity to be maintained by RBI within the overall level of its economic capital, a statement by RBI said on Monday. The committee defines economic capital as a combination of realized equity and revaluation reserves.
RBI’s realized equity, which is a form of contingency fund for meeting all risks/losses primarily built up from retained earnings, currently stands at 6.8% and the Jalan committee recommended it to be in the range of 6.5-5.5% of the balance sheet.
In changing the accounting period, the committee said, RBI would be able to provide better estimates of the projected surplus transfers to the government for the financial year for budgeting purposes. This change could reduce the need for interim dividends.
This move, the report said, would also bring about greater cohesiveness in the monetary policy projections and reports published by RBI, which mostly use the fiscal year as the base. RBI agreed to transfer ₹1.76 trillion to the government this fiscal, the central bank said after a board meeting on Monday. The transfer includes ₹1.23 trillion of surplus for 2018-19 and ₹52,637 crore of excess provisions identified as per the revised economic capital framework adopted at the meeting, RBI said in a statement on Monday.
The additional amount of ₹58,000 crore that the government will receive this year above its budgeted ₹90,000 crore as transfers from the central bank could also be used to provide fiscal stimulus or reduce off-balance sheet borrowings.
Indranil Sengupta, India economist at Bank of America Merrill Lynch, said in a report on Tuesday that it will likely be used to recapitalize state-run banks by ₹70,000 crore, as announced by finance minister Nirmala Sitharaman on Friday, with the balance transferred to the government, as already budgeted.
“This, in turn, should help to reduce lending rates," he said, adding that using excess RBI capital to recapitalize public sector banks should be liquidity- and fiscal deficit-neutral.
Sengupta said the ministry of finance will infuse capital into state-run banks with excess RBI capital and the banks, in turn, will park it in a government account with RBI.