RBI`s capital framework must be reviewed every five years: Bimal Jalan committee

The Reserve Bank Of India (RBI) on Tuesday released Bimal Jalan Committee report on Economic Capital Framework (ECF) which looked into the manner in which the surplus of central bank can be shared with the Central government. The committee was constituted by the RBI in consultation with the Government of India.

The committee has said in its report that revaluation balance of the central bank should not be distributed and has recommended 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 report said that in the following years, interim dividend to the Government may be paid only under exceptional circumstances.  The Committee also recommended that the framework may be periodically reviewed every five years but if there is a significant change in the RBI’s risks and operating environment, an intermediate review may be considered.

The Jalan Committee recommended that the surplus distribution policy of RBI should move away from targeting total economic capital alone, to one where it has a dual set of targets, including the total economic capital of the RBI and the level at which realized equity is to be maintained.

The Committee recommended that the minimum level of realized equity to be maintained should be the sum of the monetary and financial stability risks, credit risk and operational risk. 

The Committee said in its report that given the inclusion of the revaluation balances in the RBI’s overall risk buffers, measures to address volatility will have to be introduced. The Committee members examined various options and came to the conclusion that this would be done by articulating Risk Tolerance Limit.

The recommendations of Jalan Committee were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved. 

The committee also recommended that in the following years, interim dividend to the government may be paid only under exceptional circumstances. The practice of paying interim dividend commenced in 2016–17.

On Monday, the RBI had announced after a board meeting that it will transfer Rs 1.76 trillion to the government this fiscal. The transfer includes Rs 1.23 trillion of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised ECF adopted during the board meeting of the central bank.