Econ Capital Framework
RBI tweaks econ capital framework, widens Contingent Risk Buffer to 4.5-7.5%
This story was originally published at 19:47 IST on 23 May 2025
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--RBI releases revised economic capital framework
--RBI: Contingent Risk Buffer to be kept in 4.5-7.5% range
--RBI: Change Contingent Risk Buffer range to 4.50-7.50% of balance sheet
--CONTEXT: Contingent Risk Buffer range was 5.50-6.50% from FY19 to FY24
--RBI: Buffers for monetary, financial stability risks to be in 3.5-6.5%
NEW DELHI – The Reserve Bank of India has revised its economic capital framework, under which risk provisioning under the Contingent Risk Buffer will now have to be maintained within a range of 4.50-7.50%, the central bank said Friday. For 2024-25 (Apr-Mar), the central bank maintained Contingent Risk Buffer at 7.50%.
The contingent risk buffer determines the appropriate level of risk provisions that the central bank has to make and the surplus that it transfers to the government. The RBI's central board Friday approved the transfer of a record INR 2.69 trillion as surplus to the central government for FY25. This is the first major revision in the economic capital framework since 2019. In August 2019, the RBI, on the recommendation of a panel headed by former governor Bimal Jalan, adopted the Economic Capital Framework requiring it to maintain a contingency risk buffer of 5.5-6.5% of its balance sheet.
"The revised ECF (economic capital framework) provides requisite flexibility year-on-year to the Central Board (of the RBI) in the maintenance of risk buffers, considering the prevailing macroeconomic and other factors, while also ensuring needed inter-temporal smoothening of the surplus transfer to the government," the RBI said.
The RBI has tweaked the economic capital framework to bolster two key areas--more stable surplus transfers and inclusion of more sources of risks. The central bank said there has been a considerable volatility in the transfer of surplus to the government under the economic capital framework. "..the review highlighted that the transfer of surplus to the Government has not been as stable as was desirable. Besides, certain risk sources that were not included in the current framework as they were not significant, have now gained in importance and merit inclusion," the RBI said.
The RBI's Central Board of Directors met on May 15 under the chairmanship of RBI Governor Sanjay Malhotra to review the economic capital framework of the central bank.
With regards to the surplus distribution policy, the board said that any available equity in excess of 7.5% of the balance sheet size, after considering shortfall in market risk buffers, if any, may be written back from the Contingency Fund to income. In case the available equity is below the lower bound of its requirement, no surplus will be transferred to the government till at least the minimum level of required realised equity is achieved, it said.
The board widened the range for buffers for monetary and financial stability risks to 3.50-6.50% of the balance sheet, saying that it may keep it at any level between the range based on its assessment of the prevailing macroeconomic conditions and other factors affecting the balance sheet of the RBI.
The existing range of 1.0% for buffers for monetary and financial stability risks provides very limited flexibility to the central board of the RBI to smoothen the transfer of surplus to the government, the central bank said. "As surplus generated is essentially a function of the cyclical interest rates, a case could be made for a wider range, which will provide adequate flexibility to the central board to smoothen transfer of surplus to the government," it said.
The central board will continue to have the flexibility to maintain market risk buffers at any resilience level within the range of expected shortfall at 99.5% confidence level and expected shortfall at 97.5% confidence level and to maintain risk provisions for shortfall in revaluation balances accordingly, based on its assessment of expected market risk factors.
The board also called for adoption of an intergated approach, saying that off-balance sheet portfolio to also be considered, together with the on-balance sheet portfolio and for inclusion of foreign currency assets exposure in minor currencies, while computing market risk buffer requirement.
The economic capital for credit risk, including on account of off-balancesheet exposures and operational risk may continue to be maintained as hitherto, it said. End
Reported by Pratiksha and Shubham Rana
Edited by Akul Nishant Akhoury
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