RBI and its generosity By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 21, 2016 | Posted by bobbysrinivasan << back to blog

Like all commercial banks RBI has an income statement and balance sheet. According to the data available it makes significant profit every year which it returns to the central government for its operations in the form of dividends. The question that is asked is whether RBI should hold the money back and use it when it needs. This is a conversation between a student and his professor.

Student: Professor, please tell me how RBI runs its operations.

Professor: RBI business model provides a different and yet interesting study of how they function on a day to day basis. The working capital is provided by commercial banks which is currently is at 4%. In the past this rate was much higher. This amounts to 3.94240 trillion rupees as per estimate besides the aggregate deposits held with RBI by commercial banks amounts to 98.56 trillion rupees. Given a bank rate of say 6%. RBI will be able to generate 23654 crore of rupees. This is yearly and over time RBI must have earned huge amounts of return from the CRR funds.

Student: Aren’t the CRR funds received by RBI from commercial banks. Are they paying any interest on them?

Professor: As far as I know the money provided by the commercial banks in the forms of CRR does not receive any interest. In the past atleast one commercial bank argued that there should be no CRR.

Student: I read in the papers that the non-performing asset of banks amounts to 16-17% of lendable funds. Along with the CRR the commercial banks must be having a tough time to improve their profitability.

Professor: I don’t know about the validity of the data, but I know for sure that banks have done great injustice to small depositors. Pensioners who live on limited savings are continuously getting hurt. They have no choice but to put the money in the bank and receive less than inflation rate. Honestly the whole banking sector is in a big mess. They have all kinds of challenges which they will need to meet in the future. To start with Basel III requirement, our banks need a very huge capital infusion. This has to happen soon. The Indian government transfers money from its budget. But it is a small amount compared to what is needed. RBI has now mandated banks to gradually bring their single exposure to companies gradually to 10000 crore. This is going to take some effort as the current exposures are very very huge. The companies cannot adjust their balance sheets rapidly and if they did they may become bankrupt. This will also cause balance sheet recession.

Student: I am sad to hear about our banks. But I hope the concerned authorities will act tactfully to bring the order back to the banks.

Professor: At the moment banks have no way to get out of this NPA. The guarantors mostly the states have dishonoured their commitments. India has no bankruptcy to law. I feel that no serious efforts will be made by banks to recover the money. If companies want to raise money there is no effective bond market. Any way let us wait and see.

Student: Thanks Professor.

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