RBI nod to Jalan panel's ECF proposal led to Rs 1-trillion boost for govt

The decision taken by the Reserve Bank of India (RBI) last year to adopt a new surplus transfer framework, based on the Bimal Jalan committee recommendations, resulted in a windfall of more than Rs 1 trillion for the Union government during FY20.

Documents reviewed by Business Standard showed that the government would have received Rs 73,984 crore from the RBI if the central bank had adopted the previous economic capital framework (ECF). The framework outlines the methodology for determining the level of risk buffers that the RBI has to maintain.

The RBI’s central board, led by governor Shaktikanta Das, had last year approved the recommendations of the Bimal Jalan committee, which had proposed a new ECF. After that, the RBI transferred Rs 1.76 trillion to the government, including Rs 1.23 trillion of surplus and Rs 52,637 crore of ‘excess provisions’.

The documents showed that minutes before the central board meeting of the RBI in August 2019, its audit and risk management sub-committee met to approve the annual accounts of the RBI and the surplus transfer to the government.

The committee was headed by Bharat N Doshi, a member of the RBI’s central board and part of the Jalan panel. The audit committee had two more members from the Jalan panel–RBI board member Sudhir Mankad and RBI deputy governor N S Vishwanathan.
 

The committee recommended to the RBI’s central board that the previous ECF would “necessitate 40 per cent (Rs 49,366 crore) risk-provisioning out of the net income of Rs 1.23 trillion. The surplus transferable to the government would…. therefore, be Rs 73,984 crore,” according to the minutes of the meeting held on August 26, 2019. It said that since there was no requirement to transfer a sum towards risk provisioning by following the methodology suggested by the Jalan committee, the entire surplus of  Rs 1.23 trillion could be transferred to the government.

The audit committee chose to go for a lower band after deciding to maintain the contingency risk buffer (CRB) of the RBI’s balance sheet —a move which led to an additional transfer of reserves worthRs 52,637 crore. The Jalan committee had recommended a CRB within a range of 5.5 to 6.5 per cent of the balance sheet.

All of this — the recommendations on the CRB and the risk provisioning — became a part of the memorandum prepared by Vishwanathan. This was put up before the RBI’s central board for approval. Vishwanathan’s note detailed the different amount of ‘excess provisions’ the RBI could have transferred to the Centre at various levels of CRB. If the RBI had decided to maintain CRB at the upper limit of 6.5 per cent of the balance sheet, the ‘excess provisioning’ required to be transferred to the Centre would have stood at just Rs 11,608 crore.

The minutes of the RBI’s central board showed that the “directors enquired about several aspects of the report of expert committee such as consideration of model risk, alternative scenarios related to CRB, international best practices, issues related to opportunity cost etc.” 

“All queries were clarified” and the board approved the implementation of the Jalan committee report, the documents showed.