Note ban dents RBI income:

Note ban dents RBI income:

Context:

The Reserve Bank of India (RBI) on Thursday announced that it will transfer Rs 30,659 crore as surplus to the government for the year ended June 2017, less than half the amount transferred last year.

Introduction:

•  The RBI’s central board, which met on Thursday, approved the amount to be transferred.

Background:

•   In November, the Centre had announced that Rs 500 and Rs 1,000 denomination currency notes were invalid and further issued a new series of Rs 2,000 notes.
• For the year 2015-16, the RBI board had approved the transfer of surplus amounting to Rs 65,876 crore to the government.
• In the previous year, the Central bank had paid Rs 65,896 crore to the government, which came as a boon to the government in covering the deficit.
• The surplus transferred to the government was Rs 52,679 crore in 2013-14.
• The RBI did not give reasons of the sharp fall in the surplus income for the year ended June 2017.

Malegam panel report:

• The YH Malegam committee had suggested in 2014 that the Central bank can transfer its entire surplus to the government, without allocating anything to its various reserve funds, for three years because it had adequate reserve funds.
• Following the recommendations of the Malegam committee, the RBI stopped transfers to internal reserves since its accounting year 2013-14 which is now a part of expenditure.
• According to the Malegam panel report, the RBI transfers the balance of its profits to the Central Government as per Section 47 of the RBI Act, 1934, after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation fund and for all matters for which provision is to be made by or under the Act or which are usually provided by bankers.

Key points:

• For the 12 months ended June 30, 2017, the RBI will transfer a surplus of Rs 30,659 crore to the Government of India, sharply lower than the previous year’s Rs 65,876 crore.
• This is the lowest-ever surplus transfer by the RBI to the Centre since 2011-12 when it transferred Rs 16,010 crore.
•  RBI transferred about 80% of its income as surplus in the previous three years.
• Technically, the transfer of profits is provided in Section 47 of the RBI Act, which states that after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation fund and for all matters for which provisions are to be made by or under the Act or that are usually provided by bankers, the balance of the profits of the bank is required to be paid to the Central government.
• The RBI’s profit essentially represents the difference of income over expenditure. The key source of income for the Central bank is interest arising from its foreign assets and domestic assets.

Specified Bank Notes (Cessation of Liabilities) Act, 2017:

•   As per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, the scrapped currency notes of Rs 500 and Rs 1,000) “shall cease to be liabilities of the RBI under section 34 of the Reserve Bank of India Act, 1934 and shall cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act”.

Impacts:

•  The lower amount will be a concern since the government’s non-tax receipts will be affected.
• In the Budget it was assumed that around Rs 75,000 crore would come from the RBI, public sector banks and financial institutions compared with a little over Rs 76,000 cr in FY17,” rating firm Care Ratings said.
• “As public sector banks are unlikely to do better than last year and the RBI will be transferring a smaller amount, this will impact the fiscal deficit numbers. If other conditions remain unchanged, the fiscal deficit can increase from 3.2 per cent to 3.4 per cent this year,”  Care Rating pointed out.

Reasons for decline:

•  The cost of seigniorage-which is higher than RBI’ printed notes.
• There were costs of printing a huge amount of new notes to replace the notes rendered invalid following demonetization.