But the problem is in the law. Section 47 in the RBI Act mandates that the central bank should transfer all its surplus profits to the Union government. However, the amount of surplus profits must be calculated after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation funds or for any other purposes mentioned under the Act.
So, the RBI calculated its transferable surplus profit of Rs 30,659 crore after making provisions of about Rs 13,190 crore for its contingency fund and asset development fund. Such provisions are required to be made to help the central bank meet unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary or exchange rate policy operations, systemic risks, any risk on account of the special responsibilities enjoined upon the RBI and for making investments in subsidiaries and associated institutions.
It is, therefore, a little odd that the finance ministry wants the RBI to ignore the legal requirement of making such provisions and instead transfer that to the government as surplus profit. If the central bank indeed does that, it could be accused of having flouted Section 47 in the RBI Act. Worse, the share of contingency fund and asset development fund in the RBI’s total assets would have declined further.
An internal study group of the Bank had recommended that the size of these two funds should always be above 12 per cent of its assets. But this share has been consistently declining since 2012-13, when it was 10.1 per cent. In 2016-17, it has dropped to 7.6 per cent.
In other words, the Modi government has seen a steady decline in the RBI’s provisioning for the two funds. Between 2008-09 and 2012-13, the balances in these funds grew from Rs 1.67 lakh crore to Rs 2.42 lakh crore, thanks to healthy provisioning in each of these years. However, in the succeeding four years, these balances grew only marginally to Rs 2.51 lakh crore in 2016-17, even as the RBI’s assets grew at a much faster pace.
It is significant that even as the share of the two funds in RBI’s assets declined, the Union government’s revenue from RBI’s surplus profits increased sharply in the first three years of the Modi government. The government’s revenue from RBI surplus profits went up from Rs 33,000 crore in 2013-14, the last year of the Manmohan Singh government, to Rs 52,679 crore in 2014-15, Rs 65,896 crore in 2015-16 and Rs 65,876 crore in 2016-17.
The inescapable conclusion is that the government’s fiscal consolidation efforts have got a bigger boost from the RBI’s surplus profits in the last three years. And now that in the current year, the RBI could not match its earlier contributions to the central kitty, the finance ministry is putting pressure on the apex bank to cough up some more even though it will undermine norms for provisioning.
Relations between the finance ministry and the RBI have been rocky for quite some time. For some years, the bone of contention has been the direction of the interest rate policy with the RBI maintaining a stance that North Block is not comfortable about. Demonetisation and its execution glitches created another bone of contention. Now there is one more reason for tension between the two — the amount of surplus profits the RBI should transfer to the government. With fiscal deficit targets continuing to pose a challenge, the tension is unlikely to go away soon.