15 Apr

RBI & Banking Sector

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Contents

• RBI’s Surplus Transfer to Government
• Current Situation: Financial Stability Report (2023)
• Insurance Sector
  1. Insurance Regulatory Development Authority of India
  2. Situation of India’s Insurance Sector: ESI 2022-23
  3. Important Insurance Related Initiatives

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1) RBI’S SURPLUS TRANSFER TO GOVERNMENT

• Background:
  • Where does RBI get its Revenue from?
    • Foreign exchange transactions (RBI buys when dollar is cheap and sells when it is expensive (i.e. high in demand)
    • Interest Income (from government bonds, Liquidity Adjustment Facilities etc.)
    • It also earns a management commission on handling the borrowing of state governments and the central government.
• Where does RBI spend money?
  • Most of the RBI’s expenditure is on printing of currency notes, and on staff, besides the commission it gives to banks for undertaking transactions on behalf of the government across the country and to primary dealers, including banks, for underwriting some of these borrowings.
• The Surplus (Revenue – Expenditure) is used for transfers to government and increasing the RBI reserves.
  • Section 47 of the RBI Act, 1934: “After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation fund [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”
  • Section 48 of the RBI Act, 1934 exempts the bank from paying any income tax, wealth tax or super tax.
• RBI’s Reserves:
  • The RBI has three mains funds that together comprise its reserves. These are:
    • Currency and Gold Revaluation Account (CGRA) (basically the Economic Capital Buffer)
      • It is mantained by RBI to take care of currency risk, interest rate risk and movement in gold prices risk.
      • Unrealized gains or losses on valuation of foreign currency assets (FCA) and gold are not taken to the income account but instead accounted for in the CGRA. Net balance in CGRA therefore varies as per the size of the asset base, its valuation and movement in the exchange rate and price of gold.
      • When CGRA is not sufficient to fully meet exchange losses, it is replenished from the CF.
      • It is by far the largest reserve account of RBI and makes up the significant bulk of RBI’s reserve.
    • Contingency Fund (CF):
      • It is a provision meant to meet unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate operations, systematic risks and any risk arising on account of the special responsibilities enjoined upon the Reserve Bank.
      • The CF is the second biggest fund of RBI after the CGRA
    • Asset Development Fund (ADF)
      • It makes up a much smaller share of reserves and is also focused on contingent times.
• Other RBI Accounts
  • Investment Revaluation Account – Foreign Securities (IRA-FS): The unrealized gains or losses on revaluation of foreign dated securities are recorded in the IRA-FS.
  • Investment Revaluation Account – Rupees Securities (IRA-RS): The unrealized gains or losses on revaluation of Rupee securities (IRA-RS) is accounted for in Investment Revaluation Account
    – Rupee Securities (IRA-RS).
• In 2018, there was a difference between RBI and Finance Ministry on the amount of reserve RBI should keep.
• Following this, RBI in consultation with the Central Government, had constituted a committee chaired by former RBI governor Bimal Jalan to review the Extant Economic Capital Framework (ECF) for the RBI.
  • Key Recommendations of the Revised Economic Capital Framework (ECF) for the RBI:
    • Make a distinction in the economic capital of the RBI between ‘revaluation reserves‘ and ‘realized equity’.
      • Revaluation Reserves are risk buffer against market risks and not available for transfers.
    • Economic Capital Levels (basically CGRA) should be in the range of 20-24.5% of the balance sheet.
    • RBI should maintain a Contingent Risk Buffer – which mostly comes from CF – of between 5.5-6.5% of the Central Bank’s Balance Sheet. The excess amount should be transferred to government.
    • A transfer of surplus from the RBI to the government in a phased manner in accordance with the existing practice
  • 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 RBI’s pubic policy mandate and operating environment on its balance sheet and the risk involved.
• In Aug 2019, RBI board accepted all the above recommendations of the Bimal Jalan Panel committee to transfer Rs 1.76 lakh crore of surplus to government.

• RBI’s Central Board approves the transfer of surplus (i.e dividend) to the Union government for every accounting year.
• Analysis: Positives
  1. As RBI’s only shareholder government has rights over the profits of RBI.
  2. Further, RBI is amongst the most capitalized central banks in the world, so reduction of excess capital shouldn’t be a bad idea.
  3. More productive utilization of RBI’s Cash
  4. Helps government deal with economic slowdown.

2) CURRENT SITUATION: FINANCIAL STABILITY REPORT (2023)

• RBI released 28th issue of Financial Stability Report (FSR) in Dec 2023. Key highlights include:
  • The Indian economy and the domestic financial system remain resilient, supported by strong macroeconomic fundamentals, healthy balance sheets of financial institutions, moderating inflations, improving external sector positions and continuing fiscal consolidation.
  • Capital to Risk Weighted Asset Ratio (CRAR) and the Common Equity Ratio (CET1) ratio of scheduled commercial banks (SCBs) stood at 16.8% and 13.7%, respectively in Sep 2023.
  • SCB’s gross NPAs ratio continued to decline to a multi-year low of 3.2% and the net Non-Performing Asset (NNPA) ratio to 0.8% in Sep 2023.
  • Macro stress tests for credit risk reveal that SCBs would be able to comply with minimum capital requirements and the system-level CRAR in Sep 2024 projected at 14.8%, 13.5% and 12.2%, respectively, under baseline, medium and severe stress scenarios.
  • The resilience of the NBFCs sector improved with CRAR at 27.6%, GNPA ratio at 4.6% and return on assets (RoA) to 2.9%, respectively in Sep 2023.

3) INSURANCE SECTOR

• Insurance Sector and its significance:
  • Insurance is an integral part of financial sector. It plays a significant role in economic development. Apart from protection against mortality, property, and casualty risks and providing a safety net, the insurance sector encourages savings and provide long term funds for infrastructure development.

1) INSURANCE REGULATORY DEVELOPMENT AUTHORITY OF INDIA

• IRDAI is an autonomous and statutory body formed under an act of Parliament (i.e. IRDAI Act, 1999). It is responsible for managing and regulating insurance and reinsurance sector in India. It is also responsible for supervision and development of insurance sector in the country.
• Key objective of the IRDAI is to promote competition so as to enhance customer satisfaction through increased customer choices and fair premiums, while ensuring the financial security of the insurance market.
• Composition
  • As per the section 4 of the IRDAI Act, 1999 the composition of the authority is:
  1. Chairman
  2. Five whole-time members
  3. Four part-time members
  (Appointed by government of India)
• IRDAI is headquartered in Hyderabad.
• Entities regulated by IRDAI
  • Life Insurance companies:
    • Insures life of a person. This kind of insurance may also have an insurance component.
  • General Insurance companies
    • Insures health, property, car etc.
  • Re-insurance companies
    • Note: Reinsurance companies provide insurance to insurance companies. For e.g. during a huge disaster, an insurance companies may face a large number of claims. In this scenario, a reinsurance company helps them spread the risk by sharing the cost of those claims.
  • Agency Channel
  • Intermediaries
    o Corporate agents
    o Brokers
    o Etc.

2) SITUATION OF INDIA’S INSURANCE SECTOR: ESI 2022-23

• Potential and Performance of insurance sector are generally assessed based on 2 parameters,
  • Insurance penetration which refers to the ratio of total insurance premiums to GDP in a year and;
  • Insurance density which refers to ratio of insurance premium to population that is insurance premium per capita and is measured in U.S. dollar as they reflect the level of development of insurance sector in a country.
• India poised to emerge as one of the fastest growing insurance markets in the coming decade
  • Insurance Penetration in India has steadily increased from 2.7% around the turn of millennium to 4.2% in 2020.
    • Life insurance penetration in India was 3.2% in 2021, almost twice more than the emerging markets and slightly above the global average
    • However most life insurance products sold in India are saving linked with just a small protection component. Therefore households remain exposed to a significant financing gap in the event of premature death of the primary breadwinner.
• Insurance Density in India has increased from US $11.1 in 2001 to US $91 in 2021.

3) IMPORTANT INSURANCE RELATED INITIATIVES

A) BIMA VISTAAR:

• The IRDAI is planning to launch a unique all-in-one insurance product called Bima Vistaar in first quarter of FY2025.
• Bima Vistaar will provide life, health and property coverage in a single affordable policy. It will be a valuable tool for retirement planning as it eliminates the need to purchase separate policies for life, health and property coverage, providing affordability and convenience.
• Bima Vistaar is a critical component part of IRDAI’s “Insurance Trinity” initiative that also comprise Bima Sugam ((a one stop digital platform)) and Bima Vaahak (a women led distribution channel) aimed at ensuring insurance for all by 2047 by bridging the gap in product design, pricing and distribution.

B) BIMA VAAHAK SCHEME:

• Bima Vaahaks are registered individuals or legal entities providing services as outlined in the guidelines. The goal is to establish a dedicated distribution channel to enhance insurance inclusion and raise awareness in every village and gram panchayat.
  • The main objective is to establish women centric dedicated distribution channel that is focused on enhancing inclusion and creating awareness in every village/gram Panchayat, and thus improving accessibility and availability of insurance in every nook and corner of the country.
  • They will be involved in various activities – completing the proposal forms, fulfilling KYC requirements using handheld electronic communication devices, issuing insurance policies, and providing support for policy and claims related services.
• The 2023 guidelines for the women centric insurance distribution channel will be implemented concurrently with Bima Vistaar, which is in the final stages of development. In Oct 2023, IRDAI had said that the guidelines will be effective from the date of launch of BIMA Vistaar.
• Bima Vaahaks will be deployed in each gram panchayat by Dec 31, 2024.

C) BIMA SUGAM:

• The plan is to develop relatively small platform to launch Bima Vistaar and Bima Vahak effectively before integrating them into a larger platform.

D) OTHER PAST INITIATIVES

• To facilitate penetration of insurance to the lower income segments of the population the IRDAI issued IRDAI micro insurance regulations 2015 which provide a platform for distributing insurance products that are affordable for rural and urban poor and promote financial inclusion.
• Further, the IRDAI obligation of insurance to rural and social sector regulations 2015 stipulate obligation for insurers in rural and social sector and has contributed to developing and promoting micro insurance products in India.

E) VARIOUS GOVERNMENT INSURANCE SCHEME

• AB-Jan Arogya Yojna (Health Insurance)
• Pradhan Mantri Suraksha Bima Yojana:
  • Under the scheme, risk coverage of Rs 2 lakh for accidental death and complete disability and Rs 1 lakh for partial disability is given to beneficiary.
• Pradhan Mantri Jeevan Jyoti Bima Yojana:
  • Risk coverage of Rs 2 lakh is credited to the savings bank account of the holder in case of the death of the insured.
• Pradhan Mantri Vaya Vandan Yojna:
  • Old age income security is provided to senior citizens through the provision of an assured pension/return linked to the subscription amount based on a government guarantee to LIC.
• Pradhan Mantri Fasal Bima Yojna (already covered in agriculture sector)