As a warning to the government, the Bimal Jalan committee in its report said the centre’s manoeuvrability on recapitalisation of commercial banks or of the RBI could be constrained during a financial stability crisis.
“The committee recognised the need for the RBI to maintain its realised equity at an appropriate level to ensure that the country is not battling a financial stability crisis with a level of financial resources that is not perceived as credible by the market,” it said. “The committee, therefore, recognised that the RBI’s financial stability risk provisions need to be viewed for what they truly are, i.e. the country’s savings for a rainy day (a financial stability crisis), built up over decades and maintained with the RBI in view of its role as the LoLR (lender of last resort). Its balance sheet, therefore, has to be demonstrably credible to discharge this function with the requisite financial strength.”
The committee report to review the economic capital framework (ECF) of the RBI also said that the Reserve Bank of India’s (RBI’s) balance sheet should be strong enough to support banks if there is a need to recapitalise them during a financial crisis. India, with one the lowest sovereign ratings, and not having a reserve currency to boot, should not think that risky actions by the government would still be as safe as advanced economies, said the panel headed by former RBI governor Bimal Jalan.
To maintain resilience, the committee suggested a relatively smaller transfer than what was anticipated. The RBI board accepted the recommendations and transferred the maximum amount of Rs 52,637 crore as excess provisions that the committee gave leeway to.
Contrary to expectations, the committee overturned the RBI board’s previous decision of maintaining capital buffer of 3 per cent with medium-to-long term target of 4 per cent. Instead, the committee said the buffer should be between 2-6.5 per cent, and finally suggested that ‘realised equity’, or roughly the contingency fund, should be maintained between 5.5 per cent and 6.5 per cent of the assets, including 1 per cent buffer.