Bimal Jalan Panel on Economic Capital Framework
The Reserve Bank of India (RBI) has set up an expert committee, headed by its former governor Bimal Jalan, to suggest how the central bank should handle its reserves and whether it can transfer its surplus to the government. The committee will submit its report within 90 days of its first meeting.
The expert committee headed by Bimal Jalan will have former RBI deputy governor Rakesh Mohan as its vice chairman. The members of the committee are RBI central board directors Bharat Doshi and Sudhir Mankad, deputy governor N.S. Vishwanathan, and economic affairs secretary Subhash Chandra Garg.
RBIs contingency fund core reserve is only around 7% of its total assets and the rest of it is largely in revaluation reserves. Revaluation reserves fluctuate with corresponding changes in currency and gold valuations.
In 2017-18, the central bank’s contingency funds and revaluation reserves stood at ₹2.32 trillion and ₹6.92 trillion respectively.
The data shows that the growth in revaluation reserves has far exceeded the growth in the contingency fund. While revaluation reserves have more than tripled from ₹1.99 trillion in 2008-09 to ₹6.92 trillion in 2017-18, the contingency fund has grown 50% during the same period from ₹1.53 trillion to ₹2.32 trillion.
Core Reserve and Revaluation Reserve
Core Reserves are considered to be of highest quality and consists mainly of share capital and disclosed reserve. They are fully available to cover losses
Revaluation reserves arise from revaluation of assets that are undervalued in the bank’s books, Ex: Marketable Securities. The Revaluation Reserves can be used as a cushion for unexpected losses and depends mainly upon the level of certainty that can be placed on estimates.
Why the committee was formed?
The RBI and the government were at loggerhead over the transfer of surplus. The committee has been formed to look into this issue. The committee will:
- Decide whether RBI is holding provisions, reserves and buffers in the surplus of the required levels.
- Propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding lesser provisions than required.
- Suggest an adequate level of risk provisioning that the RBI needs to maintain.
The committee is expected to provide for an objective criterion to address the friction between the government and the RBI.