Capital Adequacy of Banks in India - NPTEL Adequacy of... · Capital Adequacy Standard in India •...

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




State Bank of Hyderabad




State Bank of India




State Bank of Indore




State Bank of Patiala




Capital Held by Commercial Banks in India

(2009 – 2010)

State Bank of Travancore




Capital Held by Commercial Banks in India

(2009 – 2010)

Capital Held by National Banks (2009 – 2010)

Allahabad Bank




Andhra Bank




Bank of Baroda




Bank of India




Bank of Maharashtra





Canara Bank




Central Bank of India




Corporation Bank





Dena Bank




Indian Bank




Indian Overseas Bank





Oriental Bank of Commerce




Punjab and Sind Bank




Punjab National Bank





Syndicate Bank




UCO Bank




Union Bank of India





United Bank of India




Vijaya Bank





Capital Held by Old Private Banks (2009 – 2010)

Bank of Rajasthan




Catholic Syrian Bank




City Union Bank




Dhanlaxmi Bank




Federal Bank





ING Vysya Bank




Jammu & Kashmir Bank




Karnataka Bank





Karur Vysya Bank




Lakshmi Vilas Bank




Nainital Bank





Ratnakar Bank




SBI Comm. & Intl. Bank



Capital adequacy ratio - Tier II -0.25 0.71

South Indian Bank





Tamilnad Mercantile Bank





Capital Held by Private Sector Banks (2009 – 2010)

Axis Bank




Development Credit Bank




HDFC Bank




ICICI Bank




IndusInd Bank





Kotak Mahindra Bank




Yes Bank





Capital Held by Foreign Banks (2009 – 2010)

AB Bank




Abu Dhabi Commercial Bank




American Express Banking Corp




Antwerp Diamond Bank




Bank Internasional Indonesia



Capital adequacy ratio - Tier II - -


Bank of America




Bank of Bahrain & Kuwait




Bank of Ceylon





Bank of Nova Scotia




Bank of Tokyo-Mitsubishi, UFJ




Barclays Bank





BNP Paribas




Chinatrust Commercial Bank




Citibank





Credit Agricole Bank




DBS Bank




Deutsche Bank





FirstRand Bank

Capital adequacy ratio 74.73

Capital adequacy ratio - Tier I 74.69

Capital adequacy ratio - Tier II 0.04

HSBC




J.P.Morgan Chase Bank





JSC VTB Bank



Capital adequacy ratio - Tier II

Krung Thai Bank




Mashreqbank





Mizuho Corporate Bank




Oman International Bank




Royal Bank of Scotland





Shinhan Bank




Societe Generale




Sonali Bank





Standard Chartered Bank




State Bank of Mauritius




UBS AG



Capital adequacy ratio - Tier II 0.03


Implementation of Basel II

• RBI announced in May 2004 that banks in India should

examine the options available under Basel II for revised

capital adequacy framework.

• In February 2005, RBI issued the first draft guidelines on

Basel II implementations in which an initial target date for

Basel II compliance was set for March 2007 for all commercial

banks, excluding Local Area Banks (LABs) and Regional

Rural Banks (RRBs).

• Deadline postponed to March 2008 for internationally active

banks and March 2009 for domestic commercial banks.


• RBI guidelines on Basel II implementation were released

on April 27, 2007.

• Banks in India will initially adopt standardized approach

for credit risk and basic indicator approach for

operational risk.

• After adequate skills are developed, both by banks and

RBI, some banks may be allowed to migrate towards

more sophisticated approaches.


•Indian banks will be required to maintain a minimum

CRAR of 9 per cent on an ongoing basis.

•Banks are encouraged to achieve a Tier I CRAR of at least

6 per cent by March 2010.

Basel II Issues and Challenges

• Linking credit rating to regulatory capital standards may

have severe macro-economic implications.

• As the sovereign ratings of developing and emerging

countries are not as high as the industrialized and the

high income countries, this will have an unfavourable

effect on the credit flows to developing and emerging

economies.

Basel II Issues and Challenges

• RBI’s scheme provides much less risk weights to exposures to scheduled

commercial banks than exposures to other banks/financial institutions.

• Extensive data requirement

– Implementation of Basel II, particularly the advanced approaches like the

IRB for credit risk and AMA for operational risk would require a huge

amount of data for model building and validation.

– A large number of banks in India lack reliable historical data due to late

computerization.

– Data on losses due to operational risk are currently non-existent.

– Lack of good quality historical data on credit, market and operational

risks may make migration towards the more advanced approaches of risk

management slow.

• Implementation cost:

– Basel II will lead to increased level of capital requirements.

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