Panel on RBI’s capital framework likely to be formed this week

The government and the Reserve Bank will likely by this week appoint members of an expert committee which will look into the economic capital framework (ECF) of the central bank, a source said.
In its nine-hour meeting held last week, the RBI’s board had decided to constitute a committee of experts to examine the ECF, the membership and terms of reference of which will be jointly determined by the government and the RBI. It will determine the appropriate levels of reserves the central bank ought to hold.
“The names will be decided by the RBI governor and the Finance Ministry together in next 5 to 6 days,” the source said.
The committee will have minimum of three people, which will include present and past central bankers, and officials from the Finance Ministry, the person said.
“Within two-three months, the committee will submit its recommendations. The idea is to submit the report before the closing of the financial year,” the source added.
As of June 30, 2018, RBI’s reserves stood at Rs 9.43 lakh crore, with a major portion of the reserves coming from contingency fund (Rs 2.32 lakh crore) and currency and gold revaluation account (CGRA) (Rs 6.91 lakh crore).

While the contingency fund stood at 6.41 per cent of the total assets of the RBI, the CGRA was 19.10 per cent in the year ended June 30, 2018.
In the past, the issue of the ideal size of RBI’s reserves was examined by three committees — V Subrahmanyam (1997), Usha Thorat (2004) and Y H Malegam (2013).
While the Subrahmanyam committee recommended that contingency reserve should be built up to 12 per cent, the Thorat committee had said the reserve adequacy should be maintained at 18 per cent of the total assets.
The RBI board did not accept the recommendation of the Thorat committee and decided to continue with the recommendation of the Subrahmanyam panel.
The Malegam committee recommended that adequate amount of profits should continue to be transferred each year to contingency reserves.
The issue of transfer of RBI’s reserves to the government has been a contentious issue between the two sides for a long time.
Recently, RBI Independent Director and Swadeshi ideologue S Gurumurthy had made a case for calibration of RBI’s massive reserves and said no central bank in the world maintains such high levels of surplus.
In the November 19 meeting, the RBI board also decided on a slew of measures, including a restructuring scheme for MSME borrowers with credit facilities of up to Rs 25 crore and giving banks some concession on capital adequacy norms.
It also decided to refer the issue of relaxing prompt corrective action (PCA) framework for weak banks to the Board of Financial Supervision (BFS) of the RBI.