RBI report reveals changes that helped boost dividend transfer to govt

Valuation method change, provision write-back play key roles to boost dividend

The record high dividend transfer to the government was facilitated by a change in methodology in how the gains in foreign exchange intervention are calculated, and by writing back provisions not required anymore after the Jalan committee recommendations on the economic capital framework of the Reserve Bank of India (RBI), reveals the bank’s Annual Report released on Thursday. 

The balance sheet size of the Reserve Bank of India (RBI) increased by 13.42 per cent to Rs 41.03 trillion for the year ended June 30, 2019. While income for 2018-19 increased by 146.59 per cent, the expenditure decreased by 39.72 per cent. The year ended with an overall surplus of Rs 1.76 trillion as against Rs 50,000 crore in the previous year, representing an increase of 251.97 per cent. 
 

The increase, however, was due to a couple of adjustments, as a direct result of the recommendations by Jalan committee on ECF. The committee had suggested that surplus can be transferred only from “realised equity”, and not revaluation reserves. Most of the realised equity is kept in the form of contingency fund.

 The RBI board accepted that the minimum realised equity should be always kept at 5.5 per cent of the balance sheet. 

The excess amount was therefore transferred to the government. But the committee’s recommendations also directly impacted how the provisions have to be done. Since now the realised equity has to be maintained at a fixed percentage, there was no need for excess provisions to be kept in the book. The RBI, instead, wrote it back to its income, which boosted the income for the fiscal 2018-19. 

And so, “provision no longer required and miscellaneous income” of Rs 52,618 crore was written back to the income statement. 

“During the year, exchange gain/loss has been computed using weighted average cost method resulting in an impact of Rs 21,464 crore,” the RBI disclosed in its annual report.

The methodology change has been long time coming, but could have been completed this year. The Malegam committee on the RBI’s capital adequacy had suggested that the RBI must move away from its methodology to calculate the foreign exchange gains to a weighted average cost-based valuation method. 

The report showed that the contingency fund fell to Rs 1.963 trillion in June 2019, from Rs 2.321 trillion a year ago. Currency and Gold Revaluation Account (CGRA) fell to Rs 6.645 trillion, from Rs 6.916 trillion a year ago. 

The revaluation reserve is a nominal reserve and cannot be touched for dividend purposes.

The net income from domestic sources increased by 132.07 per cent from Rs 50,880 crore in 2017-18 to Rs 1.18 trillion in 2018-19 mainly on account of increase in coupon income due to an increase in the portfolio of  rupee securities. The RBI had done secondary bond market purchases of about Rs 3 trillion in 2017-18, on which it earned interest of 7-8 per cent. 

However, analysts pointed out that the interest income component would not be of any help to the government since it is the interest paid by the government to the RBI on its bond holding. 

These enabled the central bank to transfer higher surplus of Rs 1.23 trillion in 2018-19, from Rs 50,000 crore a year ago. 

Working on the panel’s recommendations, excess surplus transfer amounted to Rs 52,637 crore. So, the total transfer in 2018-19 was worth Rs 1.76 trillion. 

Of the total surplus to be transferred, Rs 28,000 crore has already been given to the government in February. So, on a net basis, the transfer would be much lower than the gross figure suggests. 

Analysts said since the framework is rule-based now, it is highly likely that the dividend transfer to the government next year will fall substantially. And so, the transfer done this year could be a one-off exercise, if the ECF is followed strictly.