The Bimal Jalan Committee Recommendations and Application by the RBI

The RBI in consultation with the Government of India had constituted an Expert Committee in last year December to Review the Extant Economic Capital Framework of the Reserve Bank of India. The Committee was constituted under the chairmanship of Dr Bimal Jalan - former RBI Governor. 

 The Government and the RBI under previous governor Dr Urjit Patel had been at loggerheads over the ₹9 lakh crore surplus capital with the central bank. The then Deputy Governor Dr Viral Acharya was also against the transfer of the surplus to the Government and resigned from the post.

 The committee was set up to decide the manner in which the Central Bank's surplus can be shared with the Government. It was a six member committee. Dr Rakesh Mohan, former RBI Deputy Governor was the Vice-Chairman. The other members were Bharat Doshi, Sudhir Mankad - RBI Central Board Members, Rajiv Kumar (Government nominee) and N.S Vishwanathan (RBI Deputy Governor). Initially Subhash Chandra Garg - Finance Secretary was part of the committee. But as per some of the reports Dr Garg wanted to submit his dissent note in the committee report and then he was replaced with Rajiv Kumar - the new Finance Secretary. Subhash Chandra Garg was then shifted from Finance Ministry to Power Ministry. 

 In the past also various committees were formed to discuss the issue of ideal size of RBI reserves like - V Subrahmanyam committee in 1997, Usha Thorat committee in 2004 and Y H Malegam committee in 2013.


Key Recommendations and Takeaways:-

  • The Committee recommends the alignment of the financial year of RBI with the fiscal year of the Government for greater cohesiveness in various projections and publications brought out by RBI.
  • The Committee recommended adopting the Expected Shortfall (ES) methodology (in place of the extant Stressed-Value at Risk) for measuring market risk on which there was growing consensus among central banks as well as commercial banks over the recent years. 
  • While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the Committee recommended adoption of a target of ES 99.5 per cent CL and a range defined between the target and downward risk tolerance of 97.5 per cent (both under stress conditions). 
  • The range is considered appropriate to address the cyclical volatility of RBI’s valuation balances based on historical analysis.
  • The Committee recognized that the RBI’s Contingency Risk Buffer (CRB) i.e the country’s savings for a financial stability crisis, which has been consciously maintained with RBI in view of its role as Lender of Last Resort (LoLR). 
  • Financial stability risks are those rarest of the rare, fat tail risks whose likelihood can never be ruled out, especially in light of the Global Financial Crisis (GFC) and whose impact can be potentially devastating. Public policy prudence and extant statutory provisions require the RBI to maintain appropriate level of risk buffers for this purpose. The Committee recommended that the same be maintained at a range of 5.5 per cent to 6.5 per cent of the RBI’s balance sheet comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.
  • After applying these recommendations to RBI’s 2017-18 balance sheet will result in RBI’s risk equity levels in a range of 25.4 per cent to 20.8 per cent of balance sheet.
  • There will be no transfer of unrealized valuation buffers and these will be used as risk buffers against market risks.
  • The Committee has recommended a surplus distribution policy which targets not only the total economic capital (as per the extant framework) but also the realized equity level of the RBI’s capital. In view of the above recommendation, the excess realized equity as on June 30, 2018 ranges from ₹ 26,280 crores (at upper bound of CRB) to ₹ 62,456 crores (at lower bound of CRB).
  • The committee also said that in the following years, interim dividend to the Government may be paid only under exceptional circumstances.
  • The Committee recommends that the framework may be periodically reviewed every five years.

Application of Committee's Recommendations by RBI:-

  • Given that the available realized equity stood at 6.8 per cent of balance sheet, while the requirement recommended by the Committee was 6.5 per cent to 5.5 per cent of balance sheet, there was excess of risk provisioning to the extent of ₹11,608 crore at the upper bound of CRB and ₹52,637 crore at the lower bound of CRB. The Central Board decided to maintain the realized equity level at 5.5 per cent of balance sheet and the resultant excess risk provisions of ₹ 52,637 crore were written back.
  • The economic capital of RBI as on June 30, 2019 stood at 23.3 per cent of balance sheet, which lies with in the range of 24.5 per cent to 20.0 per cent recommended by the committee. As financial resilience was within the desired range, the entire net income of ₹1,23,414 crore for the year 2018-19, of which an amount of ₹28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the ₹52,637 crore of excess risk provisions which has been written back and consequently will be transferred to the Government.
Source: RBI Press Release

 Stay tuned for more updates. Feel free to comment.

 This blog is now on Telegam. For reports on Economics, Current Affairs and more, subscribe this blog on Telegam.



 You may also like to Read:
GDP Growth for Q1 2019-20 slips to 6 Year Low | Slowdown Deepens
https://politoeconomy.blogspot.com/2019/08/gdp-growth-for-q1-2019-20-slips-to-6.html

 June Industrial Production Growth Slips to 2% | Slowdown in Manufacturing
https://politoeconomy.blogspot.com/2019/08/june-industrial-production-growth-slips.html

Core Industries Growth at 50 Month Low in June 2019
https://politoeconomy.blogspot.com/2019/08/core-industries-growth-at-50-month-low.html

Comments

Post a Comment

Popular posts from this blog

Indian States and UTs Ranking: Part 1 - Area and Population wise

Image
As per the 2011 census data, Uttar Pradesh is the state having highest population while Sikkim is the least populated state. In terms of area Rajasthan is the largest state of India while Goa is the smallest state. In case of Union Territories, Andaman & Nicobar is the largest one in terms of geographical area and the Delhi comes first in terms of population. Source: Wikipedia Stay tuned for more updates. Feel free to comment. This blog is now on  Telegam . For reports on Economics, Current Affairs and more, subscribe this blog on  Telegam . You may also like to Read: State-wise Statistics : Number of Assembly, Council, Lok Sabha and Rajya Sabha Seats https://politoeconomy.blogspot.com/2018/11/state-wise-statistics-number-of.html The Statistics Lok Sabha By-Polls Post 2014 General Elections https://politoeconomy.blogspot.com/2018/11/the-statistics-lok-sabha-by-polls-post.html Is Hindi Our National Language? https://politoec...
Read more

Schedule of India's 17th General Election

Image
To conduct free and fair polls in World's largest democracy is a mammoth task. Election Commission of India, the responsible body to conduct polls today announced the schedule of the India's 17th General Election. Total 543 Lok Sabha constituencies will go to poll across the nation. Total 900 million eligible voters will cast their votes to elect new government, 84 million more than the last time. About 10 lakh polling stations this time compared to 9 lakh last time. VVPAT (Voter Verifiable Paper Audit Trail) will be used at all stations. A total 17.4 lakh VVPAT units will be used. NOTA (None of the Above) would be the last option on EVM (Electronic Voting Machine). The Chief Election Commissioner Sunil Arora in his press conference also said, "Photo voter slip can not be used as standalone proof of identity at the time of casting votes". In the wake of complaints regarding the security of EVMs, the last mile transportation of these machines will be tracked through G...
Read more

RIGHTS OF PERSONS WITH DISABILITIES ACT 2016

Image
Winter session 2016 of the Parliament was a complete wash out due the several issues, one of them was the demonetization. The Parliament witnessed heated arguments between the opposition and the government on the issue of demonetization. Only two bills were passed during the entire winter session. One is the "Taxation Laws (Second Amendment) Bill 2016", which was introduced as 'money bill' in Lok Sabha and the other bill is "Rights of Persons with Disabilities Bill 2016". The "Rights of Persons with Disabilities Act 2016" will replace the existing "People with Disabilities (Equal opportunities, Protection of Rights and Full Participation) Act 1995". The disability bill was originally introduced by the UPA-2 government in 2014 as the "Rights of Persons with Disabilities Bill 2014". To replace the 1995 act with new bill the then UPA government formed a committee. The committee was set up by the Ministry of Social Justi...
Read more