Saturday, 5 September 2015

RBI | Contingency Fund, Asset Development Fund

Why in news?
For the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund. The balance in these funds, therefore, has barely changed since 2013, when they made up 10.1 per cent of total assets.

Purpose of these funds:

  • The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital
  • A central bank may require recapitalisation, precisely at a time when the fiscal position is under strain, say, due to a financial crisis
  • In the case of extreme situations, the RBI needs funds to cope. For example, if a systemically important bank goes bankrupt, then the RBI has to take its losses onto its own balance sheet
About the Funds:
  • RBI maintains a Contingency Fund for meeting unexpected and unforeseen contingencies, including 
    • depreciation in the value of securities, 
    • exchange guarantees and 
    • risks arising out of monetary or exchange rate policy operations.
  • RBI also maintains Asset Development Reserve, created in 1997-98, to 
    • meet the internal capital expenditure and 
    • make investments in its subsidiaries and associate institutions.
The contingency reserve and the asset development reserve together constitutes less than the 12% target the central bank wanted to achieve.

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