The Reserve Bank of India on Thursday announced the members of an expert panel, with former governor Bimal Jalan as its chief, to review its economic capital framework and affix the appropriate size of the central bank’s reserves.
This comes a month after a turbulent round of board meetings following a period of friction between the Centre and the bank over excising RBI’s autonomy on matters involving surplus capital transfer worth Rs 9.6 lakh crore, among others.
Who are the members of the new panel?
Besides Jalan, the board has nominated former deputy governor Rakesh Mohan to the panel as the vice chairman.
The committee also includes Economic Affairs Secretary Subhash Chandra Garg and RBI Deputy Governor N.S. Vishwanathan, the RBI said in a statement. Two members of the existing central board of the RBI, Bharat Doshi and Sudhir Mankad, complete the six-member committee on Economic Capital Framework.
Conflict between Centre and central bank
This announcement also arrives at the heels of Urjit Patel’s resignation as the governor of the central bank on December 10. He was immediately replaced after by former economic affairs secretary Shaktikanta Das. Patel is said to have contested the appointment of Mohan to the committee.
The Finance Ministry and the board, then led by Patel, had been at loggerheads for a while over the buffer of 28% of gross assets maintained by the RBI, with the ministry arguing that it was well above the global norm of 14%. The implicit ministry demand herein is to have a reserve transfer of Rs 3-4 trillion.
In the meeting on November 19, the board had decided to formulate the panel of experts but both sides later reported differently on Mohan’s role which is what is believed to have delayed the announcement. Former deputy governor R. Gandhi told Economic Times that the committee members had been selected carefully.
They should be able to see the long-term impact of the decisions they make and not be influenced only by short-term demand, he said. They will keep in view RBIs long-term view for all periods, including high growth, low growth, forex inflows and outflows and have forethought in approaching the reserves matter.
Tasks at hand
The committee will review the status of and need for various “provisions, reserves and buffers” currently maintained by the RBI for contingency purposes. Additionally, it will also review the best practices followed by the global central banks in making assessment and provisions for risks.
The panel will take stock of the central bank balance sheet to propose a suitable profits distribution policy and determine whether the regulator needs to hold as much reserves as it currently does. It will do this by taking into account all likely situations even, one where the bank holds more provisions than required. Besides these core tasks, the RBI has also entrusted the panel to suggest an adequate level of risk provisioning that the RBI needs to maintain.
Although the board had assured earlier that accumulated reserves wont be touched, the committee will reportedly examine future payouts too. The expert committee will submit its report within 90 days from the date of its first meeting.
Precedents
This is the first time a panel on RBIs economic capital framework consists of government representatives. In the past, the issue of the ideal size of RBI’s reserves was reviewed by three committees, led by V. Subrahmanyam in 1997, Usha Thorat in 2004, and Y.H. Malegam in 2013, all associated with the central bank, with the latter two having been deputy governors.
The Subrahmanyam committee had recommended that contingency reserve should be taken up to 12%, while the Thorat committee’s recommendation that the reserve adequacy should be maintained at 18% of the total assets was rejected by the RBI board. The Malegam committee also upheld the recommendations of the Subrahmanyam committee, stressing that the adequate amount of profits should continue to be transferred each year to contingency reserves.
What’s at stake
The total reserves with the RBI stand at Rs 9.6 trillion at the end of FY18, up from Rs 8.38 trillion in FY17, while its foreign assets are worth Rs 26.4 trillion (FY18), up from Rs 23.7 trillion in FY17.
The Urjit Patel-led board also clashed with the over RBI’s stringent prompt corrective action (PCA) framework, which determines lending restrictions based on their worsening capital, asset quality profitability. If a bank breaches a particular threshold on any of these parameters, restrictions are imposed. So far, the RBI has barred 11 public sector banks from lending unless they shore up their capital base and get rid of massive bad debts.
Several board members seemed to be in of diluting the risk threshold on the Indian banks identified by the PCA. Arguing that capital norms for Indian banks are unnecessarily more stringent than what the Basel norms prescribe, they want to lower the capital adequacy ratio from 9% to 8%.
RBI officials, however, argued that the non-performing asset provision norms for Indian banks are less stringent than what Basel proposes.
Prarthana Mitra is a staff writer at Qrius