An indecent proposal

An indecent proposal: Using the RBI’s reserves to recapitalise PSB banks is a bad idea as it imperils the country’s ability to fight a meltdown



My VIEW:

DRAWING FROM RBI'S RESERVES

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…”
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)

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.
To meet the internal capital expenditure and make investments in its subsidiaries and
associate institutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total assets within the overall indicative target of 12 per cent of the total assets set for CF and ADF taken together, accepted by the Bank earlier.
Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total assets) in the context of the present growth rate of Bank’s
asset size, needs a review. Considering the size of RBI’s balance sheet, and
remembering that the Bank’s share capital(5 crore) has not been augmented since
inception, the reserves position needs to be raised to healthier levels. It is
in this context and in view of the internal and external pressures on its
income generating capabilities in recent times, as also the nature of shocks
RBI has to absorb from time to time, GOI should support the central bank to
augment its reserves at least to the level of 12 per cent of total assets which
was accepted by the Bank decades ago.

M G Warrier

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