The Centre had budgeted Rs 58,000 crore as dividend from the RBI this year
The Reserve Bank of India (RBI) on Friday paid a dividend of Rs 30,659 to the central government. This was less than half of the Rs 65,876 crore that was transferred in FY 2015-16.
We help you understand why and how RBI pays dividend to the Centre.
Why does the RBI pay a dividend?
The RBI was founded in 1934 and has been operating according to the Reserve Bank of India Act of 1934. Chapter 4, section 47 of the Act, titled “Allocation of Surplus funds” mandates for any profits made by the RBI from its operations to be sent to the Centre.
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The original provision states :
“After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds 2[and for all other matters for which provision is to be made by or under this Act or which] are usually provided for by bankers, the balance of the profits shall be paid to the Central Government.”
How does the RBI earn its profit?
The RBI earns its profits primarily from the interest it gets from the purchase and sale of government securities, the interest earned from lending to banks and an interest earned on bond holdings earned on open market principles. From this amount, the net profit is calculated by subtracting the operation expenditures, and other expenses as stipulated in section 47 of the RBI Act.
Till 2014, a certain amount used to be allocated for the Contingency Reserve (CR) and the Asset Development Reserve (ADR). However, a committee chaired by YH Malegam in 2013-14 found the balances to be in excess of the required buffer. It recommended the RBI to discontinue the transfer of funds to the CR and the ADR.
The former RBI Governor Raghuram Rajan had stated that during his tenure of three years, the RBI paid almost as much dividend to the government as in the entire previous decade.
Why the drastic drop in dividend payments?
While no official statement has been provided about the fall in dividends so far, analysts speculate that it is because of the additional costs incurred due to the printing of new currency notes, and also in managing the excess liquidity generated due to the sudden inflow of deposits into the banking system post demonetisation.
The RBI is still in the process of counting the demonetised notes. Earlier in March, Moneycontrol reported the Parliament to have enacted the Specified Bank Notes (Cessation of Liabilities) law. The law enabled the Central Bank to write off the unreturned amount from its balance sheet.
The written-off amount, under the law, can be transferred to the government as a special dividend.
However, last year, the RBI Governor maintained that the central Bank will not take that route.The Centre had budgeted Rs 58,000 crore as dividend from the RBI this year. The lower payout would encourage the Centre to borrow from the market, widening the fiscal deficit in the process.