Rich RBI and poor customers

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In recent years, the Reserve Bank of India’s transfer of surplus funds to the Centre has been impressive. For instance, in 2017-18 and 2018-19, the central bank’s transfers to the Centre were Rs 50,000 crore and Rs 1.23 lakh crore (plus Rs 52,000 crore of excess provisions as per the revised Economic Capital Framework) respectively. These transfers sparked considerable debate among economists, and perhaps also the exit of former RBI governor Urjit Patel. Were these transfers excessive? In answering this question, it must also be recognized that the net income of RBI in 2018-19 and 2017-18 were an impressive Rs 1.75 lakh crore and Rs 50,000 crore, respectively. Shouldn’t the fact that RBI is such a profitable entity be considered good news? If so, what has the entire furore been about? How much income is a reasonable income for a central bank to earn? The higher the better? Is there an optimal level of earning? What does very high earning by a central bank imply? The answers are not simple, and economists are bound to be at variance in their views on the matter.

A high proportion for the US is understandable as the US dollar is the world’s key currency and in some ways the US Federal Reserve is the banker for the world. But why should RBI’s income (and gross income, for that matter) as a proportion of the size of the economy be the highest in the world? A high profitability of the RBI seems to suggest a rather large (and inefficient) spread in the interest rate spreads governing the economy. This probably needs some fixing. Further, can RBI make better use of its highly profitable (maybe excessively so) operations, over and above transferring a significant portion of these earnings to the Centre? Yes. Take the plight of the PMC Bank depositors, for example. Even though it is widely known how pathetic and seeped in politics the governance of cooperative banks is, RBI has found it convenient to keep its oversight over these banks at a rather cursory level. It has conveniently washed its hands off by stating that they had recommended the removal of the chairman of the bank in the previous year, forgetting that as a regulator, it has the responsibility and the power to act on its recommendation. Ordinary citizens and the mundane Indian legal system in the country cannot be expected to fight the cooperative corruption of those who control most cooperative banks. Surely, the RBI earns enough to utilize at least some of it to provide for better insurance for deposits – currently at a measly Rs 1 lakh, the lowest in the world? Surely, that is directly or indirectly part of its mandate?

Can’t the RBI spend a part of its enormous surplus to take a pole position in developing such processes for under-governed sectors under its radar, like the cooperative banks? Use of blockchains to track the security of the loans and creating smart robotic algorithms to supplement ordinary governance protocol should be well within the agenda of a central bank, especially if the RBI wishes to counter corruption in banks with technology.

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