Jalan panel on RBI’s capital size

A high-level panel led by former RBI governor Bimal Jalan, set up to decide the appropriate capital reserves that the central bank should maintain, is likely to submit its report by June.

The six-member Jalan panel was appointed on December 26, 2018 to review the Economic Capital Framework for the RBI.

TASK OF THE COMMITTEE

The panel has been entrusted with the task of reviewing the best practices followed by central banks worldwide in making an assessment and provisions for risks, which a central bank balance sheet is subject to.

The panel will propose a suitable profit distribution policy, taking into account all the likely situations of the RBI, including the situation of holding more provisions than required.

BACKGROUND

The government and the RBI under previous governor Urjit Patel had been at loggerheads over the Rs 9.6 lakh crore surplus capital with the central bank.

The Finance Ministry was of the view that the buffer of 28 per cent of gross assets maintained by the RBI is well above the global norm of around 14 per cent. Following this, the RBI board in its meeting on November 19, 2018 decided to constitute a panel to examine the Economic Capital Framework.

PREVIOUS COMMITTEES ON THE ISSUE

In the past, the issue of the ideal size of Reserve Bank of India reserves was examined by three committees — V Subrahmanyam in 1997, Usha Thorat in 2004 and Y.H. Malegam as late as in 2013.

While the Subrahmanyam panel recommended building a 12 per cent contingency reserve, the Thorat panel suggested it should be maintained at a higher 18 per cent of the total assets of the central bank.

The RBI board did not accept the recommendation of the Thorat Committee and decided to continue with the recommendation of the Subrahmanyam Committee.

The Malegam panel said the RBI should transfer an adequate amount of its profit to the contingency reserves annually, but did not ascribe any particular number.

The Jalan Committee is likely to identify an excess buffer of up to Rs 3 lakh crore. This includes the excess capital in contingency reserves and also revaluation reserves.

Halving of the contingency reserves to a level of 3.25 per cent from the present 6.5 per cent will release Rs 1.282 lakh crore however the level will still 50 per cent higher than what central banks in the BRICS (Brazil, Russia, India, China and South Africa) grouping have. Similarly, halving the yield cover hike to 4.5 per cent from the present 9 per cent will release another Rs 1.170 lakh crore.