Capital Adequacy of Banks in India - NPTEL

43 Pages·2012·0.38 MB·English

Capital Adequacy of Banks
in India
Capital to Risk-Weighted Asset Ratio (CRAR)
• The Narasimhan committee endorsed the internationally
accepted norms for capital adequacy standards,
developed by the Basel Committee on Banking
Supervision (BCBS)
• BCBS initiated Basel I norms in 1988, considered to be
the first move towards risk-weighted capital adequacy
norms.
Capital to Risk-Weighted Asset Ratio (CRAR)
• In 1996 BCBS amended the Basel I norms
• In 1999 it initiated a complete revision of the Basel I
framework, to be known as Basel II.
• In pursuance of the Narasimhan Committee
recommendations, India adopted Basel I norms
– for commercial banks in 1992
– the market risk amendment of Basel I in 1996
– the revised norms of Basel II from March 2008
Basel I
• Basel I is a framework for calculating ‘capital to risk-
weighted asset ratio (CRAR).
• It defines a bank’s capital as two types:
– core (or tier I) capital comprising equity capital and
disclosed reserves;
– Supplementary (or tier II) capital comprising items
such as undisclosed reserves, revaluation reserves,
general provisions/general loan loss reserves, hybrid
debt capital instruments and subordinated term debt.
• Under Basel I, at least 50 per cent of a bank’s capital
base should consist of core capital.
• In order to calculate CRAR, the bank’s assets should be
weighted by five categories of credit risk – 0, 10, 20, 50
and 100 per cent.
Basel II
• Basel II is a much more comprehensive framework of
banking supervision.
• It not only deals with CRAR calculation, but has also got
provisions for supervisory review and market discipline.
• Basel II stands on three pillars:
Basel II Pillars
• Minimum regulatory capital (Pillar 1):
– Revised and extensive framework for capital adequacy
standards, where CRAR is calculated by incorporating credit,
market and operational risks.
• Supervisory review (Pillar 2):
– Provides key principles for supervisory review, risk management
guidance and supervisory transparency and accountability.
• Market discipline (Pillar 3):
– Encourages market discipline by developing a set of disclosure
requirements that will allow market participants to assess key
pieces of information on risk exposure, risk assessment process
and capital adequacy of a bank.
Capital Adequacy Standard in India
• In India, there is a ‘three track’ approach for Basel
compliance
– Commercial banks are Basel I compliant with respect
to credit and market risks
– Urban cooperative banks maintain capital for credit
risk as per Basel I and market risk through surrogate
charges
– Rural banks have capital adequacy norms that are
not on par with the Basel norms
Justification of Three Track Approach
• Necessity to maintain varying degree of stringency
across different types of banks in India reflecting different
levels of operational complexity and risk appetite.
• Ensure greater financial inclusion
• Efficient credit delivery mechanism.
Capital Held by Commercial Banks in India (2009 – 2010)

State Bank of Bikaner and Jaipur
Capital adequacy ratio 14.52 13.30

Capital adequacy ratio - Tier I 8.46 8.35
Capital adequacy ratio - Tier II 6.06 4.95

State Bank of Mysore

Capital adequacy ratio 12.99 12.42
Capital adequacy ratio - Tier I 7.15 7.59
Capital adequacy ratio - Tier II 5.84 4.83

State Bank of Hyderabad

Capital adequacy ratio 11.53 14.90
Capital adequacy ratio - Tier I 7.14 8.64
Capital adequacy ratio - Tier II 4.39 6.26
Capital Held by Commercial Banks in India
(2009 – 2010)
State Bank of India
Capital adequacy ratio 14.25 13.39
Capital adequacy ratio - Tier I 9.38 9.45
Capital adequacy ratio - Tier II 4.87 3.94

State Bank of Indore
Capital adequacy ratio 13.46 13.53
Capital adequacy ratio - Tier I 7.91 8.58
Capital adequacy ratio - Tier II 5.55 4.95

State Bank of Patiala

Capital adequacy ratio 12.60 13.26
Capital adequacy ratio - Tier I 6.94 8.16
Capital adequacy ratio - Tier II 5.66 5.10