Govt wants higher dividend from RBI, asks central bank to review rules

Last week the Reserve Bank of India (RBI) agreed to pay a dividend of Rs 50,000 crore to the government for the previous fiscal, including the interim dividend paid out in March. The payout has shot up 63% year-on-year, but the finance ministry is not happy. The government believes that the payout ought to be higher so it has reportedly asked the apex bank to review its dividend and capital conservation rules.

According to The Economic Times, the FinMin has also urged the RBI to look at some of its decisions with a broader economic perspective, especially liquidity management and issues related to banks.

"RBI is one of the strongest and most autonomous of institutions and not merely a banking sector regulator. It was felt that some of the decisions it has taken in the past were from a very micro perspective and that was conveyed to them," a senior government official told the daily. These topics were covered at a meeting between finance ministry officials and RBI deputy governors last week.

"These issues are not related with monetary policy," the source explained adding that, "They [RBI] are yet to come out with a clear dividend policy - this annual bickering over the dividend also doesn't look good."

As per the Reserve Bank of India Act, "After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all other matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the Central Government."

How does the RBI generate surplus profits? It's primarily interest income that it earns from lending to commercial banks, from domestic and foreign government bonds that it holds, as well as from the purchase and sale of government securities.

Though the Centre and the RBI have rarely seen eye to eye on the quantum of the surplus coming into the government coffers, matters came to a head last year. For the year ended June 2017, the RBI paid a dividend of Rs 30,659 crore, which was not only less than half the amount transferred in the previous year (Rs 65,876 crore), but also the lowest since 2011-12. The RBI follows the July-June financial year.

Significantly, in 2013, a technical committee headed by YH Malegam recommended transferring the entire surplus to the government since there was no need to build up the contingency and asset development reserves. Their balances were deemed to be in excess of the buffers needed. So the payout for 2013-14 shot up to 99.99% of the surplus generated by the apex bank, up from around 53% in the previous fiscal.

Three years of bumper dividends followed, helping the government better manage its fiscal deficit. To quote then RBI governor Dr. Raghuram G. Rajan, "In my three years at the RBI, we have paid almost as much dividend to the government as in the entire previous decade".

The RBI's annual report for 2015-16 then sounded out bad news for the Centre. The report stated that it had prepared a "draft economic capital/provisioning framework to assess its risk-buffer requirements in a structured and systematic manner", adding that this proposed framework would determine the surplus transferable each year to the government.

According to the daily, the government wants this framework to be reviewed so that it can get more funds from the RBI. The halved dividend payout for 2016-17 - on account of the additional expenses incurred on printing of new currency notes following demonetisation in November 2016, the cost of managing excess liquidity and the Rs 13,000 crore that the RBI retained as risk reserve - was the final straw.

Given that the government had estimated collecting around Rs 75,000 cr from the RBI, the state-owned banks and financial institutions in Budget 2017, it found itself hard-pressed to stick to its fiscal roadmap. In the bargain, the government had to seek out a special interim dividend of Rs 10,000 crore in March. But even then it ended the financial year with a fiscal deficit of 3.5% of GDP against the budgeted 3.2%.

Similarly, the latest RBI dividend is only 91% of the dividend collection projected in Budget 2018, and the going by the state of the public sector banks (PSBs), they can't be expected to contribute significantly to the coffers. This is why the Finance Ministry has been seeking the review of the dividend policy. "Like we did last year, there may be interim dividend this year," the economic affairs secretary Subhash Chandra Garg had said last week, adding that the review could happen in December.

The bottomline is that government believes that the RBI is one of the most highly capitalised central banks in the world and its reserves are excessive compared to global benchmarks. Hence a rethink of its internal policies is in order. The daily added that the government is also unhappy with the RBI's February 12 circular outlining a revised framework for resolution of stressed assets, which has put additional pressure on NPA-hit PSBs.  

But the RBI is unlikely to give in easily. In one of his last public speeches as RBI governor, Rajan in September 2016 had shed light on why the apex bank can't hand over fatter dividends. "Even if it were legally possible to pay unrealized surplus (it is not), and even if the Board were convinced a higher dividend would not compromise the creditworthiness of the RBI, there is a more fundamental economic reason why a special dividend would not help the Government with its budgetary constraints, said Rajan, explaining that paying a special dividend requires the RBI to create additional permanent reserves, or more colloquially, print money. "Every year, we have in mind a growth rate of permanent reserves consistent with the economy's cash needs and our inflation goals. Given that budgeted growth rate, to accommodate the special dividend we will have to withdraw an equivalent amount of money from the public by selling government bonds in our portfolio (or alternatively, doing fewer open market purchases than we budgeted)," said Rajan, adding, "But the entire objective of financing Government spending with a special RBI dividend is to reduce overall Government bond sales to the public. That objective is not achieved!"

Edited By Sushmita Choudhury Agarwal