Rich RBI, unregulated banks, and poor customers

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. So effectively, the central bank merely transferred all its earnings during the years to the Centre, as any profit-making entity is entitled to do.

That begs several other questions. Shouldn’t the fact that RBI is such a profitable entity be considered good news? If so, what has all the 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.

I therefore decided to take a slightly roundabout route by comparing the profitability performance of the central banks of the world’s 10 largest economies. The results were surprising. I may as well start with the disclaimer that this analysis can hardly be regarded unassailable; but I leave it to the common sense of the readers to make their own assessment.

The ratio of the average net income of the central bank to the GDP of the country of the top 10 economies in the world, in billions of dollars were: the US (86/21,000), China (28/14,500), Japan (3.6/5,200), Germany (0.9/4,200), India (16/2,900), France (1.5/2,900), UK (0.05/2,900), Italy (1.8/2,180), Brazil (1.1/2,090) and Canada (0.4/1,820) over the last two years. Like India, most countries pay out the surplus earned to the treasury of their respective governments every year. Nothing unusual there.

But what is interesting is to take note of the net income of the central bank as a proportion of the total GDP for each of these nations. These percentages translate to about: the US (0.41%), China (0.19%), Japan (0.07%), Germany (0.02%), India (0.55%), France (0.05%), UK (0.002%), Italy (0.08%), Brazil (0.05%) and Canada (0.02%).

These numbers suggest that RBI’s income as a proportion of the country’s GDP is the highest for the RBI as compared to all other central banks: higher than the US, twice that of China, six times that of Japan, 20 times that of Germany, and so on.

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?

To understand how profitable the RBI is, the gross income of RBI grew from Rs 33,000 crore in 2009-10 to Rs 1,93,000 crore in 2018-19, that is a mind-boggling CAGR of nearly 22%! Indeed, just from 2017-18 to 2018-19, it grew from Rs 78,300 crore to Rs 1.93 lakh crore, a rise of 146%!

Perhaps it is this humongous increase in the RBI’s earnings in 2018-19 and the consequent huge pay out to the government that triggered the furore surrounding it.

Such 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 is the governance of cooperative banks, 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? Surely, sacrificing some of its rich pickings to reduce the interest rate spread will give some traction to the trading in government securities?

Much is said about artificial intelligence and robotic process automation in the financial sector. 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. Now, that would amount to leadership.

Unfortunately, RBI does not seem to be up to the task. Its operations and so-called oversight responsibilities have remained rather staid over the decades.

(The writer is Director, Schulich School of Business, India Programme)