The Reserve Bank of India has constituted an Expert Bimal Jalan Committee on Economic Capital Framework of the RBI. The committee was formed in November 2018 to review current economic capital framework. The committee was headed by formed RBI Governor Dr. Bimal Jalan. The RBI accepted all the recommendations of the committee.
What is Economic Capital Framework?
The Reserve Bank of India (RBI) has developed an Economic Capital Framework (ECF) to provide an objective, rule-based, transparent methodology for determining the appropriate level of risk provisions to be made under Section 47 of the Reserve Bank of India Act, 1934. The framework was developed in 2014–15 and was operationalised in 2015-16.
Recommendations of Bimal Jalan Committee on Economic Capital Framework
The recommendations of committee were:
- The Contingency Risk Buffer (CRB) should be maintained at a range of 5.5 per cent to 6.5 per cent of the RBI’s balance sheet. It comprise of 4.5 to 5.5% for monetary and financial stability risks and 1% for credit and operational risks.
- To adopt the Expected Shortfall (ES) methodology (in place of the extant Stressed-Value at Risk) for measuring market risk. It recommended adoption of a target of ES 99.5% CL and a range defined between the target and downward risk tolerance of 97.5%
- The alignment of the financial year of RBI with the fiscal year of the Government for greater cohesiveness in various projections and publications brought out by RBI
- The interim dividend to the Government should be paid only under exceptional circumstances.
- The Economic Capital framework should be periodically reviewed every five years. However if there is a significant change in the RBI’s risks and operating environment, an intermediate review may be considered.
Consequences of Recommendations
Following the recommendation of committee, the Reserve Bank of India (RBI) has approved the transfer of record Rs 1.76 lakh crore dividend and surplus reserves to the government.
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