RBI had constituted a panel on Economic capital framework(ECF) to address the issue of RBI reserves.The panel was headed by Bimal Jalan.
The panel has decided to recommend the RBI to transfer the excess capital from RBI to the government over 3 to 5 years.It will also recommend that the framework should be reviewed periodically.
The panel was formed after the government has said that the RBI should hand over its surplus reserves amid a shortfall in revenue collections.
The RBI’s annual surplus transfers are key to the government bridging the budget deficit as it aims to lower the fiscal deficit to 3.0% of the gross domestic product next fiscal from the 3.3% target this year.
The panel was formed to decide (a)whether RBI is holding provisions, reserves and buffers in surplus of the required levels (b)It would propose a suitable profit distribution policy taking into account all the likely situations of the RBI and (c)will also suggest an adequate level of risk provisioning that the RBI needs to maintain.
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks.It reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
The central bank transfers its surplus to the government in accordance with Section 47 (Allocation of Surplus Profits) of the RBI Act.The act says that the amount will be arrived at after making provision for (a) bad and doubtful debts (b) depreciation in assets (c) contributions to staff and (d) superannuation fund.
The government believes that RBI is sitting on much higher reserves than it actually needs to tide over financial emergencies that India may face.Some central banks around the world like the US and UK keep 13% to 14% of their assets as a reserve compared to RBI’s 27%.