RBI should cut buffer capital, free up cash for dividend hike: Top official

The RBI calculates its capital needs based on 'stressed value-at-risk' valuations, while the government wants the central bank to use the 'value-at-risk' figure

The finance ministry will not compromise on seeking excess capital from the Reserve Bank of India (RBI) and it will press it to adopt a new dividend policy when the central bank's board meets on November 19, top government sources have told Business Standard.

 
The finance ministry seeks Rs 3.6 trillion from the central bank, but it is open to negotiating the additional surplus RBI pays apart from regular dividends.
 
“What we are asking from the RBI is to have a new policy in place for dividends and capital reserves. Currently, the RBI’s capital needs put its provisioning at 27 per cent, while most central banks have theirs at 14 per cent. Our calculations state that if RBI provisions at 14 per cent, it can free up to Rs 3.6 trillion,” said a top government official.
 
“But we are not saying provision it at 14 per cent. Keep it at, say, 18-20 per cent. Let the RBI decide that. But, it has to be less conservative in its assessment and has to decide on a policy for capital reserves and dividends,” the official said. Whatever the amount decided upon, the RBI does not have to pay at one go and could spread it over a few years, he added.

 
As Business Standard reported earlier, an internal finance ministry note earlier this year showed the government felt it was getting a lower surplus from the RBI as the central bank is extremely conservative in its assessment of its capital buffers to meet market risks. The RBI calculates its capital needs based on 'stressed value-at-risk' valuations at a 99.9 per cent confidence interval, while the government wants the central bank to use the 'value-at-risk' figure, at a 99 per cent confidence interval, which most central banks prefer.
 
RBI transfers a surplus from its balance sheet to the Centre every year as the dividend. For the July 2016-June 2017 period, it had transferred Rs 306 billion of to the government. Economic Affairs Secretary Subhash Garg publicly asked RBI for an additional Rs 130 billion from its contingency reserves to take the total surplus received for the year to Rs 430 billion. On March 27, four days before the end of FY18, it transferred an extra Rs 100 billion to the government, which would account for a part of its July 2017- June 18 payment. For this period, the RBI has said it would transfer a total Rs 500 billion.
 
The government's demand for an additional surplus has been a long-standing one. In his 2016-17 Economic Survey, former Chief Economic Advisor Arvind Subramanian had detailed the government’s view. A chart in the survey showed that only three nations – Norway, Russia, and Malaysia – had central banks with a higher equity, as a percentage of the total balance sheet, than India.
 
“There is no particular reason why this extra capital should be kept with the RBI. Even at current levels, the RBI is already exceptionally highly capitalised. In fact, it is one of the most highly capitalized central banks in the world. So, it would seem to be more productive to redeploy some of this capital in other ways,” Subramanian had said in the survey.
 
“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. It cannot be emphasised enough that any strategy to use the excess capital must be done carefully that in no way undermines or circumvents the relevant laws. It must also be done with the full cooperation of the RBI to ensure that the RBI’s independence and credibility are in no way undermined,” Subramanian had said.