I post below valued opinion of respected Sri Sibu kumar Das, retired from a bank.
I admire his interest in the matter and the way he has explained intricacies and probable outcome of RBI's decision to give surplus fund Rs.1.7 lakh crore to Government of India in unison with finding of a committee set for this purpose by RBI board.
The Expert Committee to Review the RBI's Extant Capital Framework (popularly known as Bimal Jalan Committee) has suggested many things about which I intend to write in instalments in a couple of days. Friends interested may see them as they are posted.
The committee consisted of Sri Jalan as Chairman, Dr. Rakesh Mohan as Vice Chairman, Sri N S Vishwanathan Dy Governor RBI, Sri Bharat Doshi and Sri Sudhir Mankad Members of the RBI's Central Board, and till the very end Sri S C Garg the Finance Secretary replaced by Sri Rajiv Kumar the present Finance Secretary. Sri Rajiv Kumar had in fact no role as he became the member on 30th July about a fortnight before the committee submitted its report. It is well known that Sri S C Garg had a note on dissent on the recommendations made in the report. As to why he was removed from the post and ex- officio,from the committee is a matter of conjecture.
There are reports in the 'knowledgeable press' that the committee was constituted by the Govt. (It is time that the reporters who report on such matters do enough ground work before such misleading reporting!). The committee was constituted by the RBI in consultation with the Govt. and the report was submitted to the Governor of RBI which was taken up by the RBI's Board and as approved by the Board; we come to know many things including the hitherto unprecedented transfer of funds from the Contingency Fund (CF) from the RBI to the Govt.
People(who are self-proclaimed authority on how the Central Bank is to be managed!) do not see anything unusual in this.
But let me say the way the money was taken out of the RBI coffers, albeit through the recommendations of an expert committee (The Govt.will always argue that they wanted 3 trillion "useless" money held by RBI to be "used" for the development of the economy; the then RBI Governor could not cope up with this stress and resigned; it is RBI which constituted the committee and it is the RBI's Board only which approved such transfer; AND hence the Govt. had no say in it !); does not pass the test of exigency. In case of a real threat to the economy and the banking system in particular which is now ominously looming large as the various industry feelers point out; only God forbid such a happening; the sagacity of the committee will be questioned for having removed the cushion to absorb the shock of a financial disaster !
Committees do not always find out the best possible solution and hence this famous saying, "A camel is a horse designed by a committee." "This might sound like a telling example of the terrible deficiencies of committee decisions, but it is too mild an indictment."
What the RBI did was to fall prey to the marauding extravagance of a Govt. by constituting a committee and by finding out a bureaucratic solution to a monetary issue. The concern of the committee and the solutions suggested by the committee in terms of reference made to the committee are largely, I quote from the committee report, " guided by the principle that alignment of the objectives of the Govt. and the RBI is important." (!) The Ex-Governor and the Ex-Dy Governor forgot that RBI is the Banker to the Govt. and it must always remain so. The report says of "the rainy day" and yet more than agreed to what the Govt. wanted. Obviously the solutions !!
I think RBI has nobody to blame except to itself for this financial faux pas.
In one sentence, RBI's health is now a border-line case.
P.S: More on the calculation on Risk Buffer, Economic Capital of the RBI in my next posts.
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Respected Sibu Kumar Das ji
With regards, I do not know much about the functions of RBI and risk involved. I hope my views given below will be taken in good spirit.
I am unable to understand how you write in concluding lines that health of RBI is in on border line.
If at all ,your conclusion is accepted, government of India will definitely come to its rescue as it has been protecting PSU banks for last two decades.
We must keep in mind that RBI is also a part of Indian Government. Health of RBI cannot be assessed or considered in isolation. RBI fails means government fails and vice versa.
Any government cannot allow it's financial wing like RBI and PSU banks fail or appear to fail.
Everyone knows that health of PSU banks is critical due to continuous rise in NPA and much more hidden bad debts. And to protect banks from facing disaster, they have made adequate provisions in their books as per international norms and in some cases more than that.
So far as health of RBI is concerned , there is very very remote possibility of RBI becoming victim of exchange fluctuations, or excessive expenses, or due to adverse health of PSU banks.
As such there is no harm in utilising idle fund of RBI for the purpose of development. There is no doubt that RBI still have more than required cushion for safety and enough power to meet any unseen circumstances.
In the year 2008 , USA government dealt the then financial crisis and it appears in good position still after lapse of 11 years.
On the contrary , our country was least affected from USA crisis, our the then UPA government caused immense damage to health of entire economy by providing avoidable and disproportionate stimulus packages in the name of USA originated subPrime crisis. Today's banks are suffering only due to the fact that banks were exploited and misused for selfish purposes and political gains. Now Modi government is facing the consequences of evil deeds of that govt.
We being banker know very well how during that period lending decisions used to be taken and how bad debts were either concealed or restructured or evergreened on flimsy grounds. Now worms of that period are surfacing...
We are fortunate that Modi like person has used ideas of talented and capable persons in stopping our country facing junk rating from international rating agencies. india was one of top give fragile countries. And now we are ranked among top five countries in respect of GDP growth.
There is no doubt that entire banking was in intoxication of drugs injected into it by corrupt UPA govt headed by corrupt congress party. And now during Modi regime, at least a sense of discipline and fear have been injected into minds of top business houses . And bankers are also giving full attention on the matter related to recovery. Much more is yet to be done.
Culture of lending has to improve. Quality of recruitment and promotion have to improve and much more .
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Second part of what respected Divy Das wrote on his Facebook timeline is posted below so that common bankers as well as common men who aspire to know the affects of RBIs fund transfer to GOI may understand . I once again praise his efforts in understanding and then explaining the matter in such a nice way.
In continuation with my post yesterday, I intend to write as to how and why the RBI transferred the money to Govt. As we all know by now that the RBI has decided to transfer Rs.176051 crore to Govt., comprising of Rs.123414 crore of surplus(Net Income) in full for the year 2018-19 and Rs.52637 crore of excess provisions identified as per the revised Economic Capital Framework suggested by the Jalan Committee and adopted by the Central Board of the RBI at its meeting on Aug 26. The amount of Rs.176051 crore includes Rs.28000 crore interim dividend that RBI has already paid to the Govt. Hence the balance amount of Rs.148051 crore will be paid now. Please note that this amount will be paid at one go and not in instalments.
Now about the amounts in detail and why and how!
First the amount of Rs.123414 crore. As in the past, each year the RBI pays dividend to the Govt.; there is nothing new to this. But what is new is the amount so arrived. It is the Net Income of the RBI for the year 2018-19 (the RBI accounting year is July-June till now; more about it later on). The Net Income is before risk provisioning. What has happened this year is that the entire surplus is tranfered to the Govt. without any provisioning cuts.
But why?
This is where the recommendations of the Jalan Committee come in. The Jalan Committee had gone into the various aspects of Economic Capital Framework of RBI in comparison to various other central banks and also into the surplus distribution policy and has come up with this new recommendations.
The economic capital of RBI has been stipulated at a range of 20% to 24.5% of the Balance Sheet. The economic capital stood at 23.3% as of June 2019 and hence no further provisions were warranted. The result was that the central board of RBI approved the tranfer of the entire surplus of Rs.123414 crore to the Govt. What the central board at RBI could have done was to a have a provisioning cut to make the economic capital at 24% or 24.5% to maintain at the higher side instead of going comfort at the lower side !
(Please note that like in ordinary private businesses, the capital only is the rescue of RBI as Banker to the Govt. and being the 'Lender of the Last Resort'). A better monetary resilience of RBI could have been ensured by a higher economic capital at 24.5%.
Now about the other amount, Rs.52637 crore. This amount has been found (!?) to be the excess provisions held by RBI. And since it has been found in excess as per the new norms recommended by the Jalan Committee, the amount stands tranfered to Govt. as it is in dire need of funds. Now what are provisions that RBI make and against which risks? RBI has a Contingency Fund(CF) which largely takes care of monetary and financial stability risk, credit risk and operational risk; it has an Asset Development Fund(ADF) which takes care of its investment is subsidiaries and for internal capital expenditure; it provides for shortfall in Revaluation Funds {Revaluation of its Investment Revaluation Account(Rupee Securities), Investment Revaluation Account(Foreign Securities), Currency and Gold Revaluation Account, Foreign Exchange Forward Contract Valuation Account}.
The Contingency Fund is the Contingency Risk Buffer(CRF) on realized equity basis and is derived by the Jalan Committee to be 'economic' at a range of 5.5% to 6.5% of the RBI's balance sheet. Since this CRF stood at 6.8% of the balance sheet and the requirement as per the Jalan Committee is in the range of 5.5% to 6.5%; the surplus found was to the tune of Rs.52637 crore going by the lower rate and Rs.11608 crore going by the higher rate.
Since the Central Board of the RBI decided to hold the risk buffer at the lower rate of 5.5%, it decided to tranfer Rs.52637 crore to the Govt. The RBI could have gone for the higher, should have gone for the higher rate of 6.5% and in that case the surplus of provisions to be transfered would have been Rs.11608 crore instead of Rs.52637 crore.
Now, with RBI left at the bare minimum of risk buffer; one can only pray and wish that no financial disaster befalls us and RBI's power-boat continues to sail smooth even in rough weathers.
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Statement by the All India Bank Employees Association.
All India Bank Employees Association (AIBEA) on Wednesday said the decision of Central Board of Reserve Bank of India (RBI) to transfer Rs 1.76 lakh crore in dividend and surplus reserve to the Central government will endanger economic stability.
The Central Board of the Reserve Bank of India (RBI), to transfer a sum of Rs 1,76,051 crore to the Government of India comprising Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), was adopted at its meeting on Monday last.
AIBEA General Secretary Ch Venkatachalam in a circular to its Units and Members said, It is surprising that when our country’s economy is already facing turbulence and serious slowdown, instead of taking measures that will boost the economy, efforts are being taken which will further precipitate the economic instability.
He said the RBI was specifically created as an independent institution mandated with the responsibility of ensuing the stability in the economy besides monitoring external stability, monetary stability and money supply. RBI is a totally autonomous body and is not expected to be an extension counter of the Finance Ministry or the Government, he added.
It (RBI) has very specific tasks to perform which should not be interfered with. But what is happening now is a matter of serious concern where the RBI is apparently forced to bow down to the wishes of the Central Government to release their funds to bridge the fiscal deficit of the Government, Mr Venkatachalam said.
This was being objected to by earlier top brass of the RBI and hence had to leave their jobs abruptly.
Now, ways and means are being found to force the RBI to part with huge amounts in the name of transfer of surplus, he said, adding RBI’s Reserves are meant to protect the various risks to the economy.
In fact the Reserves are not real reserves, rather it depends on the market fluctuations on gold price, dollar rate and rate of interest on Bonds. It is a notional gross value of the Reserves. This is unrealized surplus. This surplus cannot be separately extracted, the top union leader maintained.
Even while the surplus in the Contingency Fund can be transferred to the Government, what has been done by RBI now is to maintain the Reserve at 5.5 per cent at the lower band instead of at the higher band at 6.5 per cent , thus leaving no room with the RBI to meet any unforeseen contingent risk. This is the lowest level that the RBI has maintained thus far under the fund. This lowers the RBI’s flexibility to manoeuvre in future. Hence, looking from every angle, the pressure on RBI to transfer such huge amount is fraught with risk to the economic stability of the country and hence avoidable, the AIBEA General Secretary felt.
Government’s package for economic revival – a mere eyewash :
Mr Venkatachalam said, We have been expressing our serious concern about the slowdown in the economy in the recent months. We were expecting that remedial measures would be announced in the Budget. But the Government chose to claim that the economic fundamentals are quite strong and we are moving towards a 5 trillion economy. A very rosy picture was painted before the people. No concrete measures were taken to address the problems of slowdown in the economy, he added.
He, however said, Finance Minister Nirmala Sitharaman has announced various measures recently in order to revive the economy. This itself is an admission of the fact that there are problems in our economy which was stoutly denied only last month during the discussions in Parliament on the Budget.
This admission has come because the slowdown is open and visible and even the Corporates and leaders of industrial houses are talking about it.
But it is unfortunate that instead of taking measures to revive the economy and address the problems faced by those who are affected by the slowdown, the measures are only meant to help the corporates who are responsible for the loot of the economy. Further concessions have been extended to them. This is because the Government including Prime Minister Narendra Modi saying that wealth creators should be honoured, protected and respected.
He said the real wealth creators are the workers in the factories and manufacturing sector and the poor peasants in the agriculture sector, but they are not being protected from the huge loss of employment, lay-offs, and from un-remunerative prices for their produce. Government’s announcements would only benefit the corporates and not help to boost the real economy.
When Banks are already saddled with huge bad loans of the corporate sector, further pressures to ease credit flow to them will only aggravate the plight of the Banks. Banks are being forced to reduce the rate of interest on loans. Who will bear the loss of revenue for the Banks. Government should announce equivalent subsidy and not force the burden on the Banks.
'It is high time that the Government review their pro-corporate policies and take measures that will go to the succor of the suffering masses', Mr Venkatachalam said.
~ UNI
from the page of Rajiv Tyagi.
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ARE BANK MEN REALLY A FOOL?
- Necessarily Not,
But Leaders Treat Them So!
ONE may question the expertise of Bank Union leaders, who often make statements on government initiatives towards economic policies, banking, trade & industries etc. In one such a latest statement of a Bank Union leader on 28.8.2019, the RBI decision to transfer Rs 1.76 lakh crore ( of Dividend & Surplus Reserve) to Central Government is termed as 'danger to economic stability'.
Here, let us recall, a Committee under former RBI Governor Bimal Jalan was connstituted to look into RBI reserves, under revised Economic Capital Framework. The Committee recommended to transfer Rs.176051 crore to Government comprising Rs 1,23,414 crore as surplus for the year 2018-19 and Rs.52,637 crore, which the Committee identified as excess provision in Reserve in terms of ECF. The Reserve Bank of India accepted the recommendations of Committee in its Board meeting.
Surplus is always Govt's right as Dividend and in case, excess provision was made in Reserve, it was taken as wrongful surplus, which Committee recommended to return to Govt. Now, if these amounts are given to govt., how it imperils or endangers the economic stability, as alleged by leader in question, participant when economy needs more mony?
First he says, country's economy is facing turbulance & slow down, secondly he desires measures that boost economy. How, this transfer of money shall precipitate economic stability, as stated by leader? Rather, it would help govt to excellerate public investment to boost sagging economy. Govt decides the economic policy, well that needs more investment and if it is so, leader must know, further pumping Rs.176051 crore would excellerate economic condition or precipitate, as he said.
RBI decides monetary Policies. RBI by it's rules is bound to keep Reserves to a percentage of it's Liabilities. It is taken due care by Committee as well as by RBI Board. Further, why RBI should hold back surpluses, that belong to government? For RBI this is just idle and superfluous money, while for Govt. it's driver of economic fundamentals in the interest of people & nation.
RBI is autonomous, but subject to certain its own Rules under RBI Act. Surpluses are to be transferred to govt. It's RBI rule. RBI decides surplus after taking into account its assets & liabilities. RBI has been doing it very legitimatly every year, having taken due care of monetary policy and required reserves. There is nothing wrong, if it reached to surpluses in FY 2018-19. RBI follows proper accounting procedures and it gets it Balancesheet audited under law.
It's amusing that Paying Dividend or reversing excess Reserve provision is termed as interference in RBI. It's Government right to get surpluses as rightful Dividend. Does it really appeal to sanity to make such baseless allegations in such important matter, where things are well within regulatory framework of RBI & government?
Does he want to say, RBI is not doing it's task, per rules? He must have some sense to be sensible in an issue of RBI prudence.
Earlier, RBI top brasses remained silent, when Banks were under dictate of Chidambram & doing wreckless financing that culminated into 15 lakh crore NPAs. As Regulatory Authority, then RBI top brasses should have woken up and shown their spine. As a leader, he must know academia is different to professional banking. RBI is not an academic Institution, that's why right from Raghu to Urjit and new icon Viral Acharya failed to guide the destiny of Central Bank, which RBI is. Having accepted their failures, they returned to their home job to engage with old syllabus, which need no further learning.
Had any leader ever spoke against Chidambram, Man Mohan Singh, Raghu Ram Rajan? As far Urgit Patel was concerned, he was first blamed to be Ambani relative and being Gujarati termed Modi's favorite man as well. Viral Acharya appeared as new God. Banking has no trade Unions, but sleeper cell, act selectively, hardly any concern to nation, people and institutions. For them, nation, people, caste creed, religion, sex, institutions etc are political theme or you can say launching pad to target present government out of hatred and vengeance.
The leader in question failed to read and understand the difference between economic and monetary functions. These are two different parts for two different institutions, i.e. govt & RBI. Being top brass of Union, he should have this knowledge, elementary in nature.
Top leader in question must take note that this is the surplus of FY 2018-19. He is ignorant of prudential accounting norms, that's why he is trying to mislead on plea of future fluctuatiions in securities values. Does he really know accounting? It's just a question, because a knowledgeable person can't sum up the things in such stupid manner.
His statement has lambasted on govt steps in recent past to boost economy. It's not his stand. He is propagating the stand of 'left' and 'left over' bunch of parties, including Congress. Banking fraternity was anxiously awaiting his statement on Chidambaram episode, termed as king-pin of corruption. But he maintained stoic silence, as done by his political masters. He is Trade Union leader from Banking and Chidambram had perpetrated loots and plunders, leaving banks bleeding. Well, they have one task to hate and ridicule Modi and while doing, they don't mind to cross national borders. So the country and people have not to apply their mind what they say. They stand against nation, join enemy neighbors, terrorists, anti nationals and all those who kill our innocent people and soldiers. This is their trade Union line that goes parallel to anti- nation.
It's really unfortunate that in-service Bank employees and retirees are real victim of leaders' such engagements. Instead addressing in- service employees/officers horrible wages & service conditions or looking to pensioners dying under illness and suffering from financial distress for last 25 years, as their Pension, Family Pension Revision or health issues are not attended to, the leaders are involved in political gimmics and acts of buffoonaries. Better, they exercise restrain on these fissiparous tendencies and sincerely concentrate on real issues confronting the vital interest of banks and its working & retired fraternity.
- J. N. Shukla
PRAYAGRAJ
29.8.2019
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