RBI must redeploy its capital in state-owned banks
RBI must redeploy its capital in state-owned banks: With the government under pressure to meet its fiscal deficit target over the medium term, the economic survey, released by the finance ministry, on Friday said the Reserve Bank of India (RBI) should
My VIEW:
This refers to the report “RBI must redeploy its capital in state-owned banks”(The Hindu, February 27). Box 1.6 of the Economic Survey, among other things, make the following averments:
Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves + Assets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then:
M G Warrier, Mumbai
My VIEW:
February 28, 2016
RBI’s capital and reserves
This refers to the report “RBI must redeploy its capital in state-owned banks”(The Hindu, February 27). Box 1.6 of the Economic Survey, among other things, make the following averments:
“….RBI is an outlier with an equity share of about 32 per cent, second only to Norway
and well above that of the U.S. Federal Reserve Bank and the Bank of England, whose ratios are less than 2 per cent. The conservative European Central Bank (ECB) and some EM central banks have much higher ratios, but even they do not approach the level of the RBI. If the RBI were to move even to the median of the sample (16 per cent), this would free up a substantial amount of capital to be deployed for recapitalizing the PSBs. Of course, there are wider considerations that need to be taken into account…”
and well above that of the U.S. Federal Reserve Bank and the Bank of England, whose ratios are less than 2 per cent. The conservative European Central Bank (ECB) and some EM central banks have much higher ratios, but even they do not approach the level of the RBI. If the RBI were to move even to the median of the sample (16 per cent), this would free up a substantial amount of capital to be deployed for recapitalizing the PSBs. Of course, there are wider considerations that need to be taken into account…”
Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves + Assets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then:
Balances in
Contingency Fund (CF) and Asset Development Fund (ADF)(Crore)
Contingency Fund (CF) and Asset Development Fund (ADF)(Crore)
June 30
|
CF
|
ADF
|
CF+ADF
|
As%to total
assets |
|
2009
|
153392
|
14082
|
167474
|
11.9
|
|
2010
|
158561
|
14632
|
173192
|
11.3
|
|
2011
|
170728
|
15866
|
186594
|
10.3
|
|
2012
|
195405
|
18214
|
213619
|
9.7
|
|
2013
|
221652
|
20761
|
242413
|
10.1
|
|
2014
|
221652
|
20761
|
242413
|
9.2
|
|
2015
|
221614
|
21761
|
243375
|
8.4
|
Source: RBI Annual Reports
RBI’s capital since inception has remained at Rs 5 crore. There is no clarity about the components reckoned for computing the RBI’s capital and capital-like reserves at 32 per cent of balance sheet total. The Survey obviously has depended on the computation of figures by some external agency(the graph given in the Survey is attributed to BIS) instead of quoting from RBI’s Annual Reports.
M G Warrier, Mumbai
Comments