Rs. 1.76 lac crore from RBI’s reserve fund transferred to Central Government

RBI central board accepted the recommendations of the Jalan Committee – formed last year to review the economic capital framework for RBI’s reserved funds – to transfer Rs. 1.76 lac crore to the central government. The committee recommended the level of economic capital and a contingency fund for RBI. The economic capital of RBI as on June 30, 2019, was at 23.3% of the balance sheet, which falls in the recommended range of 20% to 24.5%. This paved the way for the transfer of entire net income of RBI for 2018-19, i.e. Rs. 1,23,414 crore, to the central government. The second recommendation by the committee was to have the contingency risk buffer in the range of 5.5% to 6.5%, where the central board decided to keep the contingency fund at 5.5% and approved the transfer of excess 1.3% (Rs. 52,637 crores) to the central government.

The central government was asking RBI to transfer funds from its contingency fund since the last 4-5 years, but previous two RBI governors disagreed with the government’s view. Raghuram Rajan and Urjit Patel, both were of the view that RBI should have adequate funds to tackle any unforeseen event such as currency crisis, domestic financial crisis and global financial instability; and considered it an attack on RBI’s autonomy.

The transfer of funds from RBI to central government is being done to manage the fiscal deficit, termed as a quasi-fiscal deficit. In reality, the government is managing its fiscal deficit in accounting terms by not borrowing but taking money from RBI, which is owned by the government itself.

Will the Merger of 10 Public Sector Banks help in addressing the banking crisis?

Finance Minister Nirmala Sitharaman announced merger/amalgamation of 10 public sector banks in a series of measures taken by the government to tackle the slowdown in the economy. The Minister said that merged banks will have enhanced capacity to lend more credit and will be globally competitive. Bank unions have opposed this move on several grounds. According to AIBEA, the merger of these banks will not solve the current problem of bad loans; and it is being done to cater to the demand for large-sized loans. When India needs more branches to serve the large population, the merger will lead to the closure of branches at large scale, reducing the overall number of branches.

At a time, when ‘too big to fail’ theory has failed globally, the government is trying to create ‘next-generation big banks’. The argument given by Finance Minister that merged banks will lend more and reduce the cost of lending does not hold ground as, despite multiple reductions in repo rates by RBI, it did not result into interest rate cut by the banks due to losses incurred from high non -performing assets. Banks are not willing to lend to areas where NPAs are high.

Merged banks will help in giving large loans and will help the corporate borrowers in taking large loans from a single bank than a consortium of banks. When public sector banks are already facing crisis due to bad loans given to big business houses, this move will only create more problems for public sector banks.

RBI Governor denied AQR for NBFCs

Shaktikanta Das ruled out an asset quality review for systemically important non-banking financial companies. This came at a time when there seems to be no end to the ongoing NBFC crisis and liquidity crunch despite the government’s attempts to provide credit guarantee to the banks. RBI acknowledged in its Financial Stability Report (June 2019) that failure of single large NBFC can have an impact like that of a failure of a large bank, therefore emphasizing the need for greater scrutiny and surveillance.