Economic Capital Framework Committee
Paper: General Studies 3
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Why in the news?
- The RBI, in consultation with the Government of India, had constituted an Expert Committee to Review the Extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan). The Committee has since submitted its report to the Governor of the RBI.
- The Committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved.
- The Central Board of the Reserve Bank of India (RBI) has decided to transfer a sum of ₹1,76,051 crore to the Government of India (Government) comprising of ₹1,23,414 crore of surplus for the year 2018-19 and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF)
- The Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.
What were the major recommendations of the Committee?
- RBI’s economic capital: The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance. A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was also recommended by the Committee as realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings, while revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable. Further, there was only a one-way fungibility between them which implies that while a shortfall, if any, in revaluation balances vis-à-vis market risk provisioning requirements could be met through increased risk provisioning from net income, the reverse, i.e., the use of surplus in revaluation balances over market risk provisioning requirements for covering shortfall in provisions for other risks is not permitted. The Committee recommended revising the presentation of the liabilities side of the RBI balance sheet to reflect this distinction.
- Risk provisioning for market risk: The Committee has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk on which there was growing consensus among central banks as well as commercial banks over the recent years. While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the Committee has recommended the adoption of a target of ES 99.5 per cent CL keeping in view the macroeconomic stability requirements. In view of the cyclical volatility of the RBI’s revaluation balances, a downward risk tolerance limit (RTL) of 97.5 per cent CL has also been articulated. Both levels were stress-tested for their adequacy by the Committee.
- Size of Realized Equity: The Committee recognized that the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’ (a monetary/ financial stability crisis) which has been consciously maintained with the RBI in view of its role as the Monetary Authority and the Lender of Last Resort. Realized equity is also required to cover credit risk and operational risk. This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5 per cent to 5.5 percent of the RBI’s balance sheet, comprising 5.5 to 4.5 percent for monetary and financial stability risks and 1.0 per cent for credit and operational risks. Further, any shortfall in revaluation balances vis-à-vis the market risk RTL would add to the requirement for realized equity. The Committee also recommended the development of methodologies for assessing the concentration risk of the forex portfolio as well as jointly assessing the RBI’s market-credit risk.
- Surplus Distribution Policy: The Committee has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital vis-à-vis the earlier policy which targeted total economic capital level alone. Only if realized equity is above its requirement, will the entire net income be transferable to the Government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government. Within the range of CRB, i.e., 6.5 to 5.5 percent of the balance sheet, the Central Board will decide on the level of risk provisioning.
Paper: General Studies 3
Topic: Achievements of Indians in science & technology
Why in the news?
- Chandrayaan-2’s orbiter or mother spacecraft has zeroed in on a crater on the moon named after 20th century’s acclaimed radio physicist Sisir Kumar Mitra. Images of the crater are among the second set of pictures of the northern craters sent by the orbiter.
- The Mitra crater is on the edge of another crater. The pictures were taken by the Terrain Mapping Camera-2 around 2. 15 p.m. on August 23. The orbiter was then around 4,300 km from the moon, the Indian Space Research Organisation said in its update on Monday.
- At 25 degrees Kelvin (minus 248 degrees Celsius), the northern polar region is believed to be one of the coldest spots in the solar system.
What is Chandrayaan 2?
- It is India’s second mission to the moon after the successful Chandrayaan 1 in 2008
- It comprises of three modules – an orbiter, a lander named Vikram and a rover named Pragyan.
- It was launched on board a GSLV MkIII rocket.
- The GSLV MkIII is a three stage heavy lift launch vehicle that has been designed to carry four tonne class satellites into Geosynchronous transfer orbits (GTO)
- Chandrayaan 2 weighs nearly 3,290 kg.
- It will collect scientific information on lunar topography, mineralogy, elemental abundance, lunar exosphere and signatures of hydroxyl and water ice.