Reserve Bank of India examines feasibility of policy on dividend to govt

Centre believes there will be green signal for amending the law to enable the policy

The Reserve Bank of India (RBI) is studying the feasibility of a dividend policy for itself. One which will require it to transfer a pre-determined portion of the surplus it earns to the government.

The latter, on its part, seems confident that amendments to the RBI Act, which will provide legal backing for such a policy, will be placed for Parliament’s consideration in the winter session.

“RBI will study examples of central banks of other countries which pay a set dividend to their governments. Surpluses paid in the past, as well as the recommendations of the Malegam committee, will also be studied. It remains to be seen whether RBI eventually agrees to the Centre’s demand or not,” said an official. The Centre, he added, would not proceed on the amendments without RBI’s consent. 

As reported earlier, the Centre nudged RBI to formalise a policy governing the yearly dividends it pays the former. This was in the wake of differences between the two over the dividend the Centre received for 2017-18.

The government’s nominees to the RBI board of directors — economic affairs secretary Subhash Garg and financial services secretary Rajiv Kumar — are said to have brought this issue up in their interaction with the central bank.

The planned amendments to the RBI Act would mandate the central bank to transfer a certain portion of its annual profit, after making provision for bad debt, depreciation, and other items. Unlike the centre’s April-March calendar, RBI follows a July-June financial year.

For its financial year of 2016-17, RBI had transferred Rs 306 billion of its surplus to the government, less than half the Rs 659 billion it gave a year earlier. In the Union Budget for 2017-18, the government had mentioned a dividend of Rs 749 billion from RBI and other nationalised banks. Of this, RBI’s share was expected to be Rs 580 billion. 

The Centre had then asked RBI for an additional Rs 130 billion and through the latter half of 2017-18, finance ministry officials remained confident that the amount would be transferred – it was a year of revenue disruption, due to implementing the Goods and Service Tax. RBI had held out, as the Rs 130 billion were for its contingency reserves. However, on March 27, four days before the end of the financial year, it transferred Rs 100 billion extra to the government.

There has been extensive debate in the past over the dividend policy. In 2013, a panel led by RBI board member Y H Malegam had questioned the adequacy of reserves held by the central bank. It had recommended that these be built up.

More recently, in its annual report for 2015-16, RBI said it had prepared a “draft economic capital/provisioning framework to assess its risk-buffer requirements in a structured and systematic manner”. This framework was to be used for determining the surplus transferable each year to the Centre.

IN THE PIPELINE

• RBI remains non-committal on whether it will accept govt’s demand of a dividend policy
• Govt hopeful of required amendments in RBI Act in winter session but sees no action without RBI support
• RBI studying examples of other central banks which are guided by a dividend policy
• Govt officials, in interactions with RBI, have brought up the issue of dividend policy