The RBI is recalibrating its provisioning norms to sustain high payouts, raising concerns about its long-term financial prudence and independence. Is the central bank slowly turning into a fiscal backstop for the Government?
For the financial year (FY) 2023-24, the Reserve Bank of India (RBI) Board approved a record dividend transfer of Rs 210,000 crore to the central Government. This was reflected in the accounts of the latter for the FY 2024-25. This amount was 2.4 times the dividend transfer of about Rs 87,400 crore made by the RBI for FY 2022-23 and available for use by the Centre during FY 2023-24.
Even when compared to the provision of about Rs 80,000 crore made by Sitharaman in the interim budget for FY 2024-25, the dividend amount made available from the RBI i.e. Rs 210,000 crore for use by the central Government during the year was over two-and-a-half times.
The Centre thus got a cushion of Rs 130,000 crore (210,000-80,000) or about 0.4 per cent of the country’s gross domestic product (GDP) enabling it to better manage its fiscal situation. The actual fiscal deficit (FD) for the year was 4.8 per cent against the 5.1 per cent target. During FY 2024-25, the RBI has done a repeat.
For FY 2024-25, it has announced a dividend of Rs 269,000 crore to the Central Government which will be available to the latter for use during FY 2025-26. In her Budget for FY 2025-26, Sitharaman had projected dividend income of Rs 256,000 crore cumulatively from the RBI and public sector financial institutions. The dividend from the RBI alone is Rs 13,000 crore higher. According to SBI Research’s Ecowrap, this will create a cushion of around Rs 70,000 crore which translates to 0.2 per cent of the GDP. As a result, the FD is expected to be 4.2 per cent of GDP against the budgeted level of 4.4 per cent, with other things remaining unchanged.
Apart from managing the currency and payment systems and keeping inflation/prices in check, the RBI is also mandated with managing the borrowings of the Union Government and State Governments; and supervising or regulating banks and non-banking finance companies (NBFCs). While carrying out these functions or operations, it generates a surplus.
The RBI’s income comes from the returns it earns on its foreign currency assets (FCA) — which could be in the form of bonds treasury bills and deposits with other central banks.
It also earns interest on its holdings of local rupee — denominated Government bonds or securities while lending to banks for very short tenures.
Its expenses are mainly on the printing of currency notes and staff, besides the commission, it gives to banks for undertaking transactions on behalf of the Government across the country and to primary dealers, including banks, for underwriting some of these borrowings. The excess of income over expenses is the “surplus”.
After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation fund, etc. and for all matters provided for under the RBI Act (1934), the balance of surplus is paid to the Union Government by Section 47 (Allocation of Surplus Profits) of the Act.
Apart from this routine stuff, the RBI has to deal with ‘unexpected’ and ‘unforeseen’ events by enhancing its capacity to absorb financial shocks, ensure financial stability and provide confidence to the markets.
In its Annual Report for 2015-16, it alluded to a “draft economic capital/provisioning framework to assess its risk-buffer requirements in a structured and systematic manner. In 2018, it set up a Committee on Economic Capital Framework (ECF) under Dr Bimal Jalan. The Committee recommended that the RBI should maintain a minimum Contingency Risk Buffer (CRB) of 5.5 – 6.5 per cent of its balance sheet as a risk buffer. The ECF was to remain in force for five years. The RBI adopted the ECF on August 26, 2019.
The CRB, in general, encompasses various risks like credit, operational, and monetary/ financial stability. Within the broader CRB, there is a specific type of risk buffer known as the “Monetary and Financial Stability Risk Buffer” (MFSRB).
The latter specifically addresses risks related to monetary policy implementation, exchange rate fluctuations, and the overall stability of the financial system.
The Committee proposed MFSRB to be in the 4.5 – 5.5 per cent range. From the surplus as determined above, CRB is deducted to arrive at the surplus or dividend to be paid to the Central Government.
During FYs 2018-19 to 2021-22, the RBI determined the surplus transferred to the Central Government taking the CRB at the lower end of the range i.e. 5.5 percent of the balance sheet. For arriving at the transferrable surplus during 2022-23, the CRB was increased to 6 per cent. However, for calculating the amount for 2023-24, it used the higher end of the band i.e. 6.5 per cent.
Now, the RBI has further expanded the CRB range from 5.5 – 6.5 per cent to 4.5 – 7.5 per cent. Within this, it has set the MFSRB at 3.5 – 6.5 per cent. For arriving at the surplus transfer for the FY 2024-25, it has taken the higher end of the CRB band i.e. 7.5 per cent. Despite making a higher provision for CRB, the surplus transfer to the Centre for its FY 2024-25 (read: RBI) is higher at Rs 269,000 crore (Rs 59,000 crore more than Rs 210,000 crore for FY 2023-24).
This is due to the substantial increase in the RBI’s interest income from foreign securities and from securities denominated in Rupee as well as exchange gain from foreign exchange transactions (throughout the year, the RBI sold large amounts of dollars to protect the Rupee).
Since, FY 2021-22, we have seen the RBI transferring more and more to the Central Government. The former has deliberately crafted its strategy to ensure that the latter gets more money. The expansion of the CRB range to 4.5 – 7.5 per cent is a clear pointer towards this strategy.
True, for FY 2024-25, the RBI has used the higher end of the CRB band i.e. 7.5 per cent. The reason behind this is a substantial surge in its net income; so even with higher provisions for CRB, it was able to transfer more.
But, when the income decreases, in that scenario, it could pick up the lower end of the band i.e. 4.5 per cent thereby ensuring high transfer of dividend to the Centre.
Another indication of the RBI pursuing such a strategy is available from the way it has dealt with the ‘lender of last resort’ or LOLR risk. When banks are unable to arrange loans from other sources, the RBI provides emergency liquidity assistance (ELA).
In the case of lending to public sector banks (PSBs), using the sovereign ownership argument and the owner (read: Central Government) having a deep pocket, it has assumed recovery of 90 per cent as against 80 per cent for loans given to private banks (earlier this was uniform at 80 per cent). This way, for such lending, it can lower CRB to 3 per cent of the balance sheet.
Lower provision for CRB means enhanced prospects of transferring more dividends to the Centre. This is not a healthy trend. It is none of RBI’s responsibility to take care of Government finances. As a matter of prudent policy, the latter should avoid riding piggyback on the former for managing its FD.
Even so, unlike a public sector bank (PSB) or any other public sector enterprise (PSE), the RBI is not a commercial enterprise hence, is not expected to pay any dividend.
(The writer is a policy analyst. Views expressed are personal)
https://www.dailypioneer.com/2025/columnists/record-rbi-dividends–a-boon-for-the-govt–but-at-what-cost-.html
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