What is Contingent Risk Buffer (CRB) under the RBI’s risk provisioning? 

Contingent Risk Buffer is the component of RBI’s economic capital required to cover its monetary and financial stability, credit and operational risks.

An important activity of the RBI is ensuring financial and monetary stability. Here, the RBI intervenes in the financial system whenever certain institutions individully or collectively faces financial crisis like liqudity shortage. To manage such a situation, the RBI need own funds. Here, dont misundertand that the RBI as the issure of currency can use the newly printed currency to aid banks. It is not the case. Each rupee created by the RBI enters entries in the asset and liability side of the balance sheet and the RBI has full accountabilty on currency management. While banks are facing liqudity problems, the RBI will be aiding them some times even under Lender of Last Resort Facilty, by using the funds from its historically accumulated funds known as capital reserves. This capital reserves has several components and the most important ones are the Contingency Fund (CF), Asset Development Fund (ADF). RBI defines Risk Buffer and Contingency Risk Buffer.

Economic Capital or Risk Buffer: The RBI’s risk equity comprising of its Capital, Reserve Fund, risk provisions [Contingency Fund (CF) and Asset Development Fund (ADF)], and revaluation balances (CGRA, IRA-RS, IRA-FS and FCVA).

What is the amount of fund to be kept under CRB?

Contingency Risk Buffer: Component of RBI’s economic capital required to cover its monetary and financial stability, credit and operational risks.

Now, the CBR is estimated as the amount needed to counter these risks. That is all about the estimation of the CBR needed to be kept by the RBI.

In which form the CRB is to be kept?

Now, in which form, the CBR amount is kept? Here, the RBI indicates CRB interms of Realized equity/ Available realized equity (ARE). This RE or ARE has three components,

1. Capital,
2. Reserve Fund and
3. Risk provisions (CF and ADF)

Risk provisions are in two funds – CF and ADF. Out of these, the Capital is the minuscule money contributed by the goverment at the creation or nationalisaton of the RBI and its is just Rs 5 crore. The second component, Reserve Fund also can be insignificant at around Rs 6000 crores. Bulk or nearly 98% of the ARE that can be used during a financial emergency by the RBI will be in the form of CF and ADF. To add funds to these two, the RBI makes risk provisions. Here, risk provisions is the activity of adding funds to CF and ADF by measuring the money needed to counter teh four types of risks: Financial and monetary risk (b) Credit risk and (c) Operational risk.

Adding funds to the Contingency Risk Buffer is made through risk provisioning (allocation) of funds by the RBI from its income (annually) for meeting potential risks (identified by the RBI like financial stability risk, monetary risk etc.). The Bimal Jalan Committee on Economic Capital Framework for RBI, recommendsed that the minimum level of funds to be enough to meet the monetary and financial stability risks, credit risk and operational risk. The required risk buffers for these are shown in the table.

Usually, the CRB is expressed as a percentage of the balance sheet of the RBI. As per the recommendations of the RBI, the CRB should be maintained between 5.5 % to 6.5 % of the balance sheet. Here, the risk provisioning is mainly a cushion for two vital components -both financial stability as well as monetary stability risks. The Committee recommends that the size of the monetary and financial stability risk provisions should be maintained between 4.5 to 5.5 per cent of the balance sheet. The remaining provisioning is for other type of risks. Now, this policy on CRB determines the risk provisioning needed and the amount of surplus transferred to the government. The Committee suggested an average risk provisioning over the five-year period of 2018-19 to 2022-23 for CRB of 5.5 and 6.5 per cent of the balance sheet. It is to be remembered that the committee’s recommendation time period for this is five years.

As the lowest estimate of RBI’s LoLR (Lender of Last Resort) risk is 4.6 per cent and the sum of credit and operational risk is 0.9 per cent, the lower bound of the CRB is to be maintained at 5.5 per cent with an upper bound of 6.5 per cent. The CRB requirement has been rounded-up from 5.4 – 6.4 per cent to 5.5 – 6.5 per cent, as the lowest estimate of RBI’s LoLR risk is 4.6 per cent and the sum of credit and operational risk is 0.9 per cent. Thus, the lower bound of the CRB is to be maintained at 5.5 per cent with an upper bound of 6.5 per cent.

CRB for 2022-23

For 2022-23, the RBI Central Board approved that CRB may be maintained at 6.00 per cent of the size of the balance sheet of the Reserve Bank. Accordingly, a provision of Rs 1,30,875.75 crore was made and transferred to CF during the year to maintain the CRB of 6%.

Following is the components of CRB (that is expressed in terms of ARE)

Important terminologies