Explained: Why Does The RBI Pay Thousands Of Crores In Dividend To The Govt Every Year

?30,307 crore. That is the mammoth amount paid as dividend by the RBI to the govt last year.

And in the ongoing financial year 2023-24, the government expects ?48,000 crore dividend from RBI and public sector banks.

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The dividend paid by the RBI, which acts as the banker to the government, is a major revenue source for the government. But why does India¡¯s central bank, i.e the Reserve Bank Of India (RBI) pay such huge amounts as dividend to the government?

Read on as we explain the same.

Mandatory For RBI To Pay Surplus To Govt

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As the banker to the govt, the RBI pays a dividend to government from its surplus profit every year to help with the government¡¯s finances. The RBI was founded in 1934 and has been operating according to the Reserve Bank of India Act of 1934. Chapter 4, section 47 of the Act, titled ¡°Allocation of Surplus funds¡± mandates for any profits made by the RBI from its operations to be sent to the govt.

Under Section 47 of the RBI Act, as per Moneycontrol report ¡°After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all other matters for which provision is to be made by or under this Act or which] are usually provided for by bankers, the balance of the profits shall be paid to the Central Government.¡±

It is according to this Act, the RBI pays dividend, which is usually thousands of crores (in ?) to the government from its surplus profits every year.

Also Read: How RBI Governor Is Appointed

How RBI Earns Its Profits?

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The RBI reportedly earns its profits primarily from the interest it gets from the purchase and sale of government securities, the interest earned from lending to banks and an interest earned on bond holdings earned on open market principles.

From this amount, the net profit is calculated by subtracting the operation expenditures, and other expenses as stipulated in section 47 of the RBI Act. The surplus can be simply understood as a residual of the income earned and expenditure component of the RBI¡¯s balance sheet.

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How RBI Acts As Banker To The Govt?

In terms of Section 20 of the RBI Act 1934, Reserve Bank Of India has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations. Further, as per Section 21 of the said Act, RBI has the right to transact Government business of the Union in India.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the Act. Such agreements as of now exist between RBI and all the State Governments. Thus, the legal provisions vest the RBI with both the right and obligation to function as banker to the government, as mentioned on the RBI website.

Also Read: How RBI Creates & Distributes Indian Rupee Banknotes

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