A BONE OF CONTENTION

A BONE OF CONTENTION

On a certain turn out of events the reserve surplus with RBI has become a bone of contention, with the impending meeting with the Board of Directors’ scheduled for November 19, 2018. RBI has to have reserve in accordance with the global norms which is 14% of the GDP. GDP as of December 2017 was 2597.49 billion USD. RBI’s surplus reserve is at 27% at the moment. The real issue is, the Central Government has asked the RBI to fix a norm on the surplus reserve held by it and transfer funds after the limit or threshold is set. RBI from its side so far has no bench mark to limit and it has to decide the surplus only after its adequacy level is fixed.

Though the media were reporting various figures, it was confirmed that only a ball park figure was quoted when the talk of the global norm came up. As of 30th June this year the surplus reserve held with RBI is 9.63 lakh crores. This issue has to be seen from the RBI and the CENTRAL GOVERNMENT angles. Why RBI keeps surplus reserve? RBI has to take the following factors into consideration for maintaining surpluses they are listed as follows, as they are independent of Government and they are Bankers Bank, lender of the last resort.

·        Provision for bad debts

·        Contribution to staff

·        Take care of Depreciation of assets from Asset development resources

·        Surplus annual balance funds to be considered

·        Transfer of its profits to its owner that is the GOVERNMENT

·        Balance volatility in foreign exchange holdings and Government securities.

·        Asset related costs

·        Contingency Reserve

From the GOVERNMENT side the points to be considered are,

·        Fiscal deficit, but this Government has considerably brought down FD, so the surplus asked for is ruled out as far as FD goes.

FINANCIAL YEAR

PERCENTAGE

2013-14

5.1%

2018-19

3.3%

·        Money transferred by RBI to Government: For the financial year 2017-18 the money transferred was 30,659 crores and in March 2018, 10000 and August 2018, 40000 crores totalling to 50000 crores.

·        Government needs support from RBI to enable weak banks.

·        Immense liquidity problem in NBFCs’ has to be considered.

Every year just before the UNION BUDGET, RBI and the Government talk about surplus amount which are put forth in the budget and later in August every year RBI makes the announcement of the transfer amount. This time around Government is proposing to invoke section 7 of the RBI Act, where, it can instruct the RBI to transfer the funds in public interest, or nominate a director to supervise and conduct the affairs of the bank, or nominate a Deputy Governor in the absence of the Governor to supervise and conduct the affairs of the bank. Government has just initiated the matter prior to the 19th November meeting and it’s for the Board to decide amidst the speculated rumours.

-Vijayashree Ramesh

The writer is an advocate based at Chennai