Contingency Risk Buffer ( CRB)

May 17, 2025

Why in News? The Ministry of Finance is actively involved in reviewing the Reserve Bank of India’s (RBI) capital buffer rules.

Focus is on the rules determining the central bank’s surplus or dividend transfer to the government.

Relevance : UPSC Pre & Mains

Prelims : CRB

Mains : GS 3

Key Points

Economic Capital of RBI: Refers to the funds and reserves maintained by the RBI to cover risks and ensure financial stability.
Contingency Risk Buffer (CRB): A critical reserve maintained to address unexpected financial crises or risks.
Current CRB Range: Set between 5.5% and 6.5% of the RBI’s balance sheet.

About Bank’s Economic Capital

Definition: The bank’s economic capital represents the reserves and risk provisions maintained to absorb potential losses and ensure financial stability.
Components: Includes revaluation accounts, contingency funds, and asset development funds.
Purpose: Acts as a financial cushion to mitigate risks arising from currency fluctuations, credit losses, operational risks, and external shocks.
Significance: Ensures the central bank’s capacity to fulfill its mandate without depending on external support.

About Contingency Risk Buffer (CRB)

Definition:
The CRB is a reserve maintained by the Reserve Bank of India (RBI) to address unexpected financial risks and economic shocks.
Objective:
To safeguard the central bank’s financial resilience against risks such as market volatility, currency devaluation, or systemic crises.
Composition:
It is a part of the RBI’s economic capital, distinctively allocated to manage unforeseen and extreme contingencies.
Current Range:
The CRB is maintained at 5.5% to 6.5% of the RBI’s balance sheet, based on its economic capital framework.
Significance:

- Ensures financial stability in times of economic uncertainty.
- Protects against potential liabilities arising from credit, market, and operational risks.
- Supports the credibility and operational independence of the central bank.

Impact on Dividend Transfer:
The level of the CRB directly influences the surplus or dividend transferred by the RBI to the government, affecting fiscal resources.