From UPSC perspective, the following things are important :
Prelims level : RBI profits
Mains level : Issue over transfer of surplus funds of RBI
- The RBI Board approved a surplus transfer of Rs 1,76,051 crore to the central government.
How does a central bank like the RBI make profits?
- The RBI is a “full service” central bank— not only is it mandated to keep inflation or prices in check, it is also supposed to manage the borrowings of the GOI and of state governments; supervise or regulate banks and NBFCs; and manage the currency and payment systems.
- While carrying out these functions or operations, it makes profits.
- Typically, its income comes from the returns it earns on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.
- It also earns interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight.
- It claims a management commission on handling the borrowings of state governments and the central government.
- Its expenditure is mainly on the printing of currency notes and on staff.
- Besides the commission it gives to banks for undertaking transactions on behalf of the government across the country, and to primary dealers, including banks, for underwriting some of these borrowings.
Arrangement for surplus transfer
- The RBI isn’t a commercial organisation like the banks or other companies that are owned or controlled by the government – it does not, as such, pay a “dividend” to the owner out of the profits it generates.
- Although RBI was promoted as a private shareholders’ bank in 1935 with a paid up capital of Rs 5 crore, the government nationalized it in January 1949, making the sovereign its “owner”.
- What the central bank does, therefore, is transfer the “surplus” – that is, the excess of income over expenditure – to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the RBI Act, 1934.
- Like in India, central banks in both the UK and US decide after consultations with the government.
- But in Japan, it is the government that decides.
- By and large, with a few exceptions, the quantum of surplus transfer averages around 0.5% of the GDP.
Does the RBI pay tax on these earnings or profits?
- Its statute provides exemption from paying income-tax or any other tax, including wealth tax.
- Section 48 (Exemption of Bank from income-tax and super-tax) of the RBI Act, 1934 provides that the Bank shall not be liable to pay income-tax or super-tax on any of its income, profits or gains.
Is there an explicit policy on the distribution of surplus?
- But a Technical Committee of the RBI Board headed by Y H Malegam, which reviewed the adequacy of reserves and a surplus distribution policy, recommended, in 2013, a higher transfer to the government.
- Earlier, the RBI transferred part of the surplus to the Contingency Fund, to meet unexpected and unforeseen contingencies.
- It was also transferred to the Asset Development Fund, to meet internal capital expenditure and investments in its subsidiaries to build contingency reserves of 12% of its balance sheet.
- But after the Malegam committee made its recommendation, in 2013-14, the RBI’s transfer of surplus to the government as a percentage of gross income (less expenditure) shot up to 99.99% from 53.40% in 2012-13.
- The government has long held the view that going by global benchmarks, the RBI’s reserves are far in excess of prudential requirements.
- Former Chief Economic Advisor Arvind Subramanian had suggested that these funds be utilized to provide capital to government-owned banks.
- The central bank, on its part, has traditionally preferred to be more cautious and build its reserves – keeping in mind potential threats from financial shocks, and the need to ensure financial stability and provide confidence to the markets.
- From the central bank’s perspective, bigger reserves on its balance sheet is crucial to maintaining its autonomy.