CONCEPT – DIVIDEND FROM RBI TO GOVERNMENT

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 CONCEPT – DIVIDEND FROM RBI TO GOVERNMENT

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    • 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.
    • The provision : It states that - “After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds [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.
    • Earlier and now : 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 drop in dividend payments in 2016-17? It may be 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. Parliament enacted the Specified Bank Notes (Cessation of Liabilities) law, that 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. But in 2017 the RBI Governor maintained that the central Bank will not take that route.
    • The 2018-19 situation : The central board of the Reserve Bank of India approved additional interim dividend payment of Rs. 28,000 crore to the government, for the half-year ended December 31, 2018. This was on top of Rs. 50,000 crore paid to the government in August 2018, including Rs. 10,000 crore interim dividend paid in March 2018. This is the second successive year that the Reserve Bank will be transferring an interim surplus.
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                                                                                                                                        PT's IAS Academy: CONCEPT – DIVIDEND FROM RBI TO GOVERNMENT
                                                                                                                                        CONCEPT – DIVIDEND FROM RBI TO GOVERNMENT
                                                                                                                                        Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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