INTERIM DIVIDEND: ANALYSIS
Feb. 21, 2019

Meaning: 

  • The interim dividend is the future income that the RBI has prepaid. This will have to be adjusted from its dividend payment due next year. 

  • Section 47 of the RBI Act 1934 says that the surplus profit should be transferred to the government “only after making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds (and for all other matters)”. The Act is silent on when the payment should be made.

  • The central bank follows a July-June financial year, while the central government follows an April-March year. 

Recent decision: 

  • The Reserve Bank of India (RBI) has decided to transfer an additional ₹28,000 crore as dividend to the Union government for the half-year ended 31 December 2018. 

  • The move could help the government meet its revised fiscal deficit target of 3.4% of GDP in 2018-19 amid a shortfall in revenue collections. 

Significance: 

  • The recent decision of the RBI should come as a big relief to the NDA government. Together with the ₹40,000-crore final surplus share for 2017-18, which the Centre received in the first half, the total receipts from the RBI this fiscal will be a ₹68,000 crore. 

  • For a government struggling to meet the revised fiscal deficit target of 3.4% of GDP, the RBI’s assistance will be handy. 

Concerns: 

  • This is the second successive year the RBI is making an interim transfer: last year it transferred ₹10,000 crore. 

  • Though there is nothing wrong in a shareholder demanding an interim dividend payout, the fact is that the Centre is advancing a receipt from the next fiscal to bail itself out in the current one. 

  • Also, the RBI is not like a corporate enterprise, nor can the government compare itself with a company shareholder. 

  • The RBI’s income and surplus growth cannot be measured in commercial terms since a large part of it comes from statutory functions it has to perform as a regulator.  

  • Also, governments are advised against such practices, especially in an election year. Sudden transfers not just surprises different stakeholders, but can also raise doubts over the fiscal position of the government. 

  • Transfers of dividends have become a bone of contention between the government and the central bank. Urjit Patel resigned from the post of RBI governor in December 2018 after alleged differences with the government on the issue. 

Way ahead: 

  • A system for sharing the RBI’s surpluses with the Centre must be quickly institutionalised. The government would do well to clearly define the timing and nature of these transfers from the central bank and make it rule-based. 

  • For this, RBI set up an expert committee in December headed by former governor Bimal Jalan to review the economic capital framework of the bank. It will suggest how the central bank should handle its reserves and whether it can transfer its surpluses to the government. It is to submit its report by March-end. 

Lessons from other countries: 

  • A paper by David Archer and Paul Moser-Boehm of Bank for International Settlements published in 2013 says that the rule-based regimes have four features: targets for buffers/reserves, retention schemes, dividend smoothing, and arrangements in case of central bank losses. 

  • They also add that despite having laws, in most cases central banks are at the mercy of the government. They point to following examples – 
    • The Bank of England is required to distribute to the exchequer 100 percent of any issue department surplus and 50 percent of any banking department surplus, irrespective of the state of equity reserves. 

    • The Central Bank of Ireland can only retain a maximum of 20 percent of any surplus, independent of the state of equity. 

    • Some central banks have targets for reserves. For instance, in Mexico, when reserves become negative, the central bank can retain higher profits to make the reserve in black again. 



  • Hence, the allocation rules can help avoid frictions, but at the end of the day, it is a government’s call on whether it wants to accept the rules in the first place or not. 

  • So the broad idea is that there is no one way to think about the issue of allocation of central bank profits. 

https://www.thehindu.com/opinion/editorial/interim-bailout/article26314663.ece