Surplus Transfer to Government from RBI

Prelims: Current events of national and international importance| Indian Economy

Why in news?

For the financial year 2024-25, the RBI is expected to transfer a record Rs 2.5-3 lakh crore, that exceeds the previous record of Rs 2.11 lakh crore transferred in 2023-24.

• RBI’s Surplus - Surplus is the excess of RBI’s income over expenditure, after provisioning for reserves and contingencies.
• It is not a dividend, as RBI is not a company but a statutory body owned by the government.
• Legal Basis - The transfer occurs under Section 47 of the Reserve Bank of India Act, 1934, which mandates that after making necessary provisions, "the balance of the profits shall be paid to the Central Government.
• Evolution of Transfer Policy – Initially, the RBI transferred its surplus profits to the government without a structured framework.
• In 2013, the Malegam Committee recommended increasing surplus transfers to support fiscal deficit reduction efforts.
• This led to a significant rise in transfers, with the RBI transferring 99.99% of its surplus in 2013-14, up from 53.4% in 2012-13.
• Earlier, part of the surplus was set aside for:
  • Contingency Fund (CF) for unforeseen events.
  • Asset Development Fund (ADF) for capital investments and subsidiaries.
• Economic Capital Framework (ECF) - In 2018, the Bimal Jalan Committee was formed to review the RBI's economic capital Framework.

The ECF provides a structured approach to determine the appropriate level of risk provisioning (CRB) and guides the surplus transfer to the government.

• The committee recommended maintaining a Contingent Risk Buffer (CRB) between 5.5% and 6.5% of the RBI's balance sheet.
• Any excess over this range could be transferred to the government.
• The ECF was adopted in August 2019, that provoide a structured approach to surplus distribution.

The RBI is exempt from paying income tax or any other tax on its earnings under Section 48 of the RBI Act.

• Global Practice - In countries like the US and UK, the surplus transfer is decided in consultation with the government.
• In Japan, the government unilaterally decides the transfer.
• Globally the surplus transfer typically averages around 0.5% of GDP.

Reference

The Indian Express| Surplus Transfer to Government from RBI