Bimal Jalan Panel On Economic Capital Framework

• 31 Dec 2018

The Reserve Bank of India (RBI), in consultation with the government, has set up a six-member committee headed by the former RBI Governor Bimal Jalan to review the economic capital framework of the Reserve Bank of India.

• Composition:
  • Former RBI Governor Bimal Jalan (Chairman)
  • Former Deputy Governor of RBI Rakesh Mohan (deputy chairman)
  • Economic Affairs Secretary Subash Chandra Garg (member),
  • RBI Deputy Governor N.S. Vishwanathan (member)
  • RBI board member Bharat Doshi (member)
  • RBI board member Sudhir Mankad (member)
• The committee would submit its report within 90 days from the date of its first meeting.
• The mandate of Committee:
  • Review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI.
  • To review best practices followed by the central banks globally in making assessment and provisions for risks, to which central Bank Balance sheets are subjected.
  • Suggest an adequate level of risk provisioning that the RBI needs to maintain, and to determine whether it is holding provisions, reserves and buffers in surplus or deficit of the required level.
  • Propose a suitable profit distribution policy taking into account all the likely situations of the RBI, including holding more provisions than required and the RBI holding less provisions than required.

Background

• The government and the central bank have been at loggerheads over issues including relaxation of prompt corrective action norms on weak banks, special liquidity window for Non-Banking Financial Companies (NBFC), and the transfer of surplus reserves to the government.
• The government has been insisting that the central bank hand over its surplus reserves amid a shortfall in revenue collections.
• This will allow the government to meet deficit targets, infuse capital into weak banks to boost lending and fund welfare programmes.
• There are two components to RBI’s reserves:
  • A Contingency Fund of Rs 2.5 lakh crore.
  • A Currency and Gold Revaluation Reserve of Rs 6.91 lakh crore.
• The core reserve —contingency fund—is only around 7% of its total assets and the rest of it is largely in revaluation reserves, which fluctuate with corresponding changes in currency and gold valuations. In 2017-18, the central bank’s contingency funds and revaluation reserves stood at ₹2.32 trillion and ₹6.92 trillion respectively.
• The transfer from the unrealised gains in the currency and gold revaluation reserve is not possible without a sale of gold or foreign currency assets.
• Hence, the debate is centered around whether the central bank is holding excess contingency reserves and whether it should transfer any more funds to it in the future.
• The RBI Act makes it clear that all the profits of the Reserve Bank must be transferred to the government. However, the issue is what are the profits based on the accounting method used.
• It can be noted that earlier in 2013-14 RBI had referred the same issue (to review the level and adequacy of internal reserves and surplus distribution policy of the RBI) to a technical committee headed by Mr. Y H Malegam.
  • Following this, the draft Economic Capital Framework was formulated which highlighted the reasons why the RBI needs resources.
  • The needs included-
    • market intervention operations,
    • carrying out the functioning of the lender of last resort,
    • to de-risk the financial system.
  • It also highlighted the fact that if the central banks suffer losses and do not have adequate buffers they would have to depend on the government for recapitalization.
  • This dependence had implications on the autonomy of the Central Bank as well as the concern that the government might not have the fiscal space in a crisis situation.