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Bimal Jalan Committee

  Jun 11, 2020

Bimal Jalan Committee

Who set up the committee and why?

Reserve Bank of India (RBI), in consultation with the Government of India, had constituted an Expert Committee to Review the Extant Economic Capital Framework of the Reserve Bank of India in 2018. Its Chairman was Dr. Bimal Jalan. 

What criteria were adopted by the Committee for the recommendations?

The Committee submitted its report to the Governor of the RBI. The Committee’s recommendations were based on the 

  • Consideration of the role of central banks’ financial resilience, 
  • Cross-country practices, 
  • Statutory provisions, 
  • The impact of the RBI’s public policy mandate and operating environment on its balance sheet and 
  • The risks involved.

What policy sensitivities did the Committee take into considerations?

The Committee’s recommendations were guided by the fact that the RBI forms the primary pillar for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.

What are the major recommendations of the Committee with regard to risk provisioning and surplus distribution related to RBI’s economic capital?

Before we discuss the recommendations, we need to see the distinction between the realised and revaluation balances. 

While discussing the economic capital, the committee makes a clear distinction between realized equity and revaluation balances: the former is the profit (surplus already made) and the latter is the profit that is notional profit which is still unbooked.

Why should we differentiate?

The need for the distinction arises because a realized equity could be used for meeting all risks/ losses as they are built up from retained earnings and are available for distribution; while revaluation balances could be seen only as risk buffers against market risks as they represent unrealized valuation gains and hence are not distributable. 

What should be the optimum size of realized equity?

The Committee recognized that the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’ (a monetary/ financial stability crisis) which has been consciously maintained with the RBI in view of its role as the Monetary Authority and the Lender of Last Resort. Realized equity is also required to cover credit risk and operational risk. This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet.

What Surplus Distribution Policy did it recommend?

 The Committee has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital in contrast to the earlier policy which targeted total economic capital level alone. 

Only if realized equity is above its requirement, will the entire net income be transferable to the Government. 

If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government. 

Within the range of CRB, i.e., 6.5 to 5.5 percent of the balance sheet, the Central Board will decide on the level of risk provisioning.

What is the balance sheet of the RBI and how much is it currently?

The balance sheet of RBI in 2018-19, that is its assets and liabilities, is Rs 40.5 lakh crore. 

Did the government gain from the recommendations?

Yes. The Central Board accepted all the recommendations of the Committee. It took 5.5% of the balance sheet and that meant that the government would gain more. 

The Central Board of the Reserve Bank of India (RBI) decided to transfer a sum of ₹1,76,051 crore to the Government of India (Government) comprising of ₹1,23,414 crore of surplus for the year 2018-19 and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF).