Context: The Central Board of Directors of the Reserve Bank of India (RBI) recently approved the transfer of ₹87,416 crore as surplus to the Union government for the accounting year 2022-23, almost thrice the ₹30,307 crore transferred for the previous fiscal year. The RBI’s board also decided to raise the Contingency Risk Buffer to 6%, from 5.5% in the preceding year.
Source of Earnings for RBI:
- Interest on Government securities held
- Interests on loans and advances made
- Interest earned on Liquid Adjustment Facility operations
- Interest income from foreign currency assets held
- Earnings from forex swaps
- Seigniorage
| Composition of RBI’s balance sheet | |
| Liabilities | Assets |
| Capital Reserves Revaluation AccountsDeposits of Banks and Government Currency notes in circulation | Foreign Currency AssetsGoldInvestments in domestic securitiesLoans & Advances |
- Capital reserves: Two important components are
- Contingency fund: The fund is set aside by RBI for meeting unforeseen contingencies like risks arising out of monetary policy operations, exchange rate risks or systemic risks.
- Asset development fund: This fund is set aside for investments in subsidiaries and associate institutions and to meet internal capital expenditure.
These two funds are considered as Risk provisions of the RBI and provisioned from the earnings of RBI. Such capital required to withstand risks is also known as Economic Capital.
- Revaluation Accounts: RBI maintains revaluation accounts to insulate its assets (Gold, foreign currency, Investments in domestic and foreign securities) from prevailing market trends. They include Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account (IRA) and Foreign Exchange Forward Contracts Valuation Account (FCVA).
- Deposits: In its traditional role as a banker to the government, RBI usually accepts government deposits, which constitutes a liability for the central bank. The central bank also accepts deposits from other banks and other financial instituions.
- Currency notes in circulation is a liability of the central bank.
How surplus is shared with Central government?
After meeting the risk provisions and other operational expenditures (salaries etc.) from the earnings of RBI, the surplus is transferred to the central government in the form of dividends. Surplus transfer from the Reserve Bank is an important component of non-tax revenues to the central government. However, the quantum of dividends shared with the central government depends upon the amount of money provided for risk provisioning, especially for contingency fund.
There occurred a controversy regarding the excess capital reserves accumulated with the RBI and sharing of dividend with the central government in 2018. To sort out this controversy a committee (Bimal Jalan committee) was appointed to review the Economic Capital Framework. The Committee had prescribed a Contingency Risk Buffer in the range of 5.5% to 6.5% of its balance sheet.
