Changes in RBI Accounting Year to Put Curbs on Contentious Interim Dividends

RBI

Reserve Bank of India (RBI) has decided to change its accounting period from July-June to March-April, aligning with the government’s fiscal year. This move would bring predictability and cohesiveness in structuring the finances and policies of the government and the Union budget. However, it would put more restrictions on the practice of RBI issuing interim dividend to the government.

Crux of the Matter

Reserve Bank of India has decided to shun the 8 decades-old practice of accounting from July to June. In the 582nd meeting of the Central Board of Directors of RBI, the board evaluated the domestic and global economic situation that may foster or hinder operations of RBI. As proposed by the former RBI governor, Bimal Jalan, and his committee, RBI will change its accounting year from July-June to align it with government’s fiscal year April-March. In the year 1940, RBI had changed its accounting year to July-June from Jan-Dec.

For the change, RBI will prepare a truncated Balance Sheet – a shorter Balance Sheet than usual – from the period of 9 months from July 2020 to March 2021 and then settle on the changed accounting period.

Implications
As per the board, this change is aimed at aligning the efforts of RBI with the Union Budget and Centre’s policy so as to bring cohesiveness in implementation.

The change in the accounting year would to an extent remove RBI’s concern for deciding the timing of its operations like the Market Stabilization Scheme (MSS) or Open Market Operation (OMO). Moreover, it would bring predictability in transferring funds to the government for the purpose of prudent budgeting.

The most important change would be the end of the practice of transferring interim dividend by RBI to the government. RBI would only extend the interim dividend in ‘extraordinary circumstances’.

Contentious Interim Dividend
RBI’s source of income comes from currency trading and government bonds. Setting aside part of the income for ‘operational and contingency needs‘, RBI may transfer the excess amount to the government in the form of interim dividend.

RBI had kept its accounting year different – at a 3-month delay – so as to allow a sufficient time gap to audit and review accounts of the banks and the Central Government. Government may demand an interim dividend from the Central Bank to support its spending and boost the economy as well as for filling the potholes in government’s financials. As much as this practice is not advisable, doing so may smoothen that year’s financial position. Turkey, before India received interim dividend, had amended its Central Bank Act to force its Central bank to pass on interim dividend to the government right before elections.

In February 2019, former RBI governor Urjit Patel did not agree to transfer INR 28,000 crore to the Narendra Modi-led government as elections were fast approaching. The contentious issue of interim dividend led Urjit Patel to resign and Shaktikanta Das was incumbent.

Curiopedia

Government’s Banker and Debt Manager – Just as individuals need a bank to carry out their financial transactions effectively and efficiently, governments also need a bank to carry out their financial transactions. The RBI serves this purpose for the Government of India (GoI). As a banker to the GoI, the RBI maintains its accounts, receive payments into and make payments out of these accounts. The RBI also helps the GoI to raise money from the public via issuing bonds and government-approved securities. In Sep 2019, a decision at RBI directors meet was taken to change the RBI financial accounting year to March–April to align itself with the central government calendar instead of the current June–July year. More Info

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