RBI DIVIDEND

1. Context

On February 18, the RBI Board meeting in New Delhi approved an interim dividend payout of Rs 28,000 crore to the government, which expected to help keep the fiscal deficit at the projected 3.4 percent of GDP for 2018-19.

It is the second year running the RBI has paid an interim dividend to the government and approved an interim payout of Rs 10,000 crore last year.

2. RBI generates profits (or surplus)

• A central bank’s income typically 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, deposits with other central banks, the interest it earns on its holdings of local rupee-denominated government bonds or securities.
• When lending to banks for very short tenures (such as overnight) and management commission on handling the borrowings of state governments and the central government.
• The RBI buys these financial assets against its fixed liabilities as currency from the public and deposits issued to commercial banks on which it does not pay interest.
• A central bank’s expenditure is mainly on printing currency notes and staff on commissions 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.
• The central bank’s total costs, including expenditure on printing and commissions is only about a seventh of its total net interest income, implies that it generates a large surplus.

3. The government claim on the RBI’s profits/surplus

• The Government of India is the sole owner of the RBI. Like many other global central banks are owned by the governments of their countries.
• The government can make a legitimate claim to this surplus.
• By its role as the manager of the country’s currency, the RBI generates more surplus than the entire public sector put together.
• The former RBI Governor Raghuram Rajan put it, belongs entirely to the country’s citizens. The RBI has been setting aside what is needed to be retained as equity capital to maintain its creditworthiness and pay out the remaining surplus to the government?

4. About RBI

• The RBI isn’t a commercial organization like the banks and other firms the government owns or controls.
• It was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, but the government nationalized it in January 1949, making the sovereign the “owner” of RBI.

• This is done in early August by the central board of the RBI after the completion of the bank’s July-June accounting year.

5. Additional dividends

• The much of the surplus the RBI generates comes from the interest on government assets from the capital gains it makes off other market participants.
• When this paid to the government as a dividend the RBI is putting back to the system the money it has made from it.
• There is no additional money-printing or reserve-creation involved.
• But when the RBI pays an additional dividend to the government, it has to create additional permanent reserves are to print money.
• To accommodate the special dividend the RBI would have to withdraw an equivalent amount of money from the public by selling government bonds in its portfolio.

6. Large payouts

• All central banks worry that large payouts can limit their ability to create buffers that would cushion the impact of a crisis.
• Seeking both financial stability and autonomy/independence central banks are reluctant to seek assistance from governments.

7. Demands for an interim dividend 

• It does indicate that finances are under pressure.
• Last year, the RBI paid out an interim dividend of Rs 10,000 crore; the interim dividend payout announced this week is close to three times that amount.
• The government is trying hard to narrow its fiscal deficit, as it spends extra even as revenues aren’t booming.
• The fact is that during periods of high growth, as we saw during the last decade, the government doesn’t make such demands sign that high growth in revenues obviates the need to dip into the extra surplus of the RBI.

 8. The global practice on payment of surplus

• Almost all central banks, the US Federal Reserve, the Bank of England, Germany’s Bundesbank, or the Reserve Bank of Australia are owned by their respective governments and have to transfer their surplus or profits to the Treasury or the equivalent of India’s Finance Ministry.
• The UK has a formal Memorandum of Understanding on the financial relationship between the Treasury and the Bank of England, which lays down a clear framework for passing on 100% of net profits to the government.
• The US Fed transfers all its net earnings to the Treasury.

 For Prelims & Mains