Capital Adequacy of Banks 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 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

State Bank of India Capital adequacy ratio 14.25 13.39 Capital adequacy ratio - Tier I 9.38 9.45 Capital adequacy ratio - Tier

II4.87 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

II5.55 4.95

State Bank of Patiala


II5.66 5.10


State Bank of Travancore


II5.44 4.50


Capital Held by National Banks (2009 – 2010)

Allahabad Bank Capital adequacy ratio 13.11 13.62 Capital adequacy ratio - Tier I 8.01 8.12 Capital adequacy ratio - Tier

II5.10 5.50

Andhra Bank


II4.55 5.50

Bank of Baroda


Bank of India


Bank of Maharashtra

Capital adequacy ratio 12.05 12.78 Capital adequacy ratio - Tier I 6.11 6.41

Capital adequacy ratio - Tier II 5.94 6.37


Canara Bank


Central Bank of India


Corporation Bank


II4.71 6.12


Dena Bank


Indian Bank


Indian Overseas Bank


II5.32 6.11


Oriental Bank of Commerce


Punjab and Sind Bank


Punjab National Bank


II5.05 5.05


Syndicate Bank


UCO Bank


Union Bank of India


II5.08 4.60


United Bank of India

Capital adequacy ratio 13.28 12.80

Capital adequacy ratio - Tier I 7.56 8.16


Vijaya Bank Capital adequacy ratio 13.15 12.50




Capital Held by Old Private Banks (2009 – 2010)

Bank of Rajasthan Capital adequacy ratio 11.50 7.52



Catholic Syrian Bank




City Union Bank Capital adequacy ratio 12.69 13.46 Capital adequacy ratio - Tier I 11.48 12.41 Capital adequacy ratio - Tier II 1.21 1.05

Dhanlaxmi Bank Capital adequacy ratio 15.38 12.99 Capital adequacy ratio - Tier I 13.75 8.80 Capital adequacy ratio - Tier II 1.63 4.19

Federal Bank Capital adequacy ratio 20.22 18.36 Capital adequacy ratio - Tier I 18.42 16.92 Capital adequacy ratio - Tier

II1.80 1.44


ING Vysya Bank Capital adequacy ratio 11.65 14.91 Capital adequacy ratio - Tier I 6.89 10.11 Capital adequacy ratio - Tier II 4.76 4.80

Jammu & Kashmir Bank Capital adequacy ratio 14.48 15.89 Capital adequacy ratio - Tier I 13.80 12.79 Capital adequacy ratio - Tier II 0.68 3.10

Karnataka Bank Capital adequacy ratio 13.48 12.37 Capital adequacy ratio - Tier I 10.60 9.98 Capital adequacy ratio - Tier

II2.88 2.39


Karur Vysya Bank Capital adequacy ratio 14.92 14.49 Capital adequacy ratio - Tier I 14.40 12.88 Capital adequacy ratio - Tier II 0.52 1.61

Lakshmi Vilas Bank Capital adequacy ratio 10.29 14.82 Capital adequacy ratio - Tier I 8.81 12.01 Capital adequacy ratio - Tier II 1.48 2.81

Nainital Bank Capital adequacy ratio 13.10 15.68 Capital adequacy ratio - Tier I 11.85 14.38 Capital adequacy ratio - Tier

II1.25 1.30


Ratnakar Bank


SBI Comm. & Intl. Bank Capital adequacy ratio 21.24 27.31 Capital adequacy ratio - Tier I 21.49 26.60 Capital adequacy ratio - Tier II -0.25 0.71

South Indian Bank Capital adequacy ratio 14.76 15.39 Capital adequacy ratio - Tier I 13.22 12.42 Capital adequacy ratio - Tier

II1.54 2.97


Tamilnad Mercantile Bank





Capital Held by Private Sector Banks (2009 – 2010)

Axis Bank Capital adequacy ratio 13.69 15.80



Development Credit Bank Capital adequacy ratio 13.30 14.85



HDFC Bank


ICICI Bank Capital adequacy ratio 15.53 19.41 Capital adequacy ratio - Tier I 11.84 13.96 Capital adequacy ratio - Tier II 3.69 5.45

IndusInd Bank Capital adequacy ratio 12.55 15.33 Capital adequacy ratio - Tier I 7.65 9.65 Capital adequacy ratio - Tier

II4.90 5.68


Kotak Mahindra Bank Capital adequacy ratio 20.01 18.35



Yes Bank Capital adequacy ratio 16.60 20.60 Capital adequacy ratio - Tier I 9.50 12.90 Capital adequacy ratio - Tier II 7.10 7.70


Capital Held by Foreign Banks (2009 – 2010)

AB Bank




Abu Dhabi Commercial Bank Capital adequacy ratio 47.57 44.79



American Express Banking Corp


Antwerp Diamond Bank Capital adequacy ratio 26.79 33.72 Capital adequacy ratio - Tier I 26.44 33.46 Capital adequacy ratio - Tier II 0.35 0.26

Bank Internasional Indonesia Capital adequacy ratio 501.34 531.80 Capital adequacy ratio - Tier I 501.34 531.80 Capital adequacy ratio - Tier

II - -


Bank of America


Bank of Bahrain & Kuwait Capital adequacy ratio 25.52 25.01 Capital adequacy ratio - Tier I 24.47 24.45 Capital adequacy ratio - Tier II 1.05 0.56

Bank of Ceylon Capital adequacy ratio 45.18 50.85 Capital adequacy ratio - Tier I 44.11 49.49 Capital adequacy ratio - Tier

II1.07 1.36


Bank of Nova Scotia Capital adequacy ratio 12.70 13.15 Capital adequacy ratio - Tier I 9.75 11.03 Capital adequacy ratio - Tier II 2.95 2.12

Bank of Tokyo-Mitsubishi, UFJ Capital adequacy ratio 29.51 68.16 Capital adequacy ratio - Tier I 28.80 67.40 Capital adequacy ratio - Tier II 0.71 0.76

Barclays Bank Capital adequacy ratio 17.07 16.99 Capital adequacy ratio - Tier I 16.62 16.47 Capital adequacy ratio - Tier

II0.45 0.52


BNP Paribas


Chinatrust Commercial Bank Capital adequacy ratio 45.40 31.12 Capital adequacy ratio - Tier I 44.75 30.70 Capital adequacy ratio - Tier II 0.65 0.42

Citibank Capital adequacy ratio 13.23 18.14 Capital adequacy ratio - Tier I 12.42 17.27 Capital adequacy ratio - Tier

II0.81 0.87


Credit Agricole Bank


DBS Bank Capital adequacy ratio 15.70 16.96 Capital adequacy ratio - Tier I 10.27 11.14 Capital adequacy ratio - Tier II 5.43 5.82

Deutsche Bank Capital adequacy ratio 15.25 16.45 Capital adequacy ratio - Tier I 14.62 15.77 Capital adequacy ratio - Tier

II0.88 0.79


FirstRand Bank

Capital adequacy ratio 74.73

Capital adequacy ratio - Tier I 74.69 Capital adequacy ratio - Tier II 0.04

HSBC Capital adequacy ratio 15.31 18.03 Capital adequacy ratio - Tier I 14.12 16.63 Capital adequacy ratio - Tier II 1.19 1.40

J.P.Morgan Chase Bank Capital adequacy ratio 15.90 23.63 Capital adequacy ratio - Tier I 15.38 22.92 Capital adequacy ratio - Tier

II0.52 0.71


JSC VTB Bank

Capital adequacy ratio 317.51 225.93 Capital adequacy ratio - Tier I 317.51 225.93 Capital adequacy ratio - Tier II

Krung Thai Bank Capital adequacy ratio 81.86 61.02 Capital adequacy ratio - Tier I 80.61 59.77 Capital adequacy ratio - Tier II 1.25 1.25

Mashreqbank Capital adequacy ratio 76.80 78.21 Capital adequacy ratio - Tier I 75.55 76.96 Capital adequacy ratio - Tier

II1.25 1.25


Mizuho Corporate Bank Capital adequacy ratio 37.58 38.98 Capital adequacy ratio - Tier I 37.29 38.60 Capital adequacy ratio - Tier II 0.29 0.38

Oman International Bank Capital adequacy ratio 25.17 41.08 Capital adequacy ratio - Tier I 23.25 39.83 Capital adequacy ratio - Tier II 1.92 1.25

Royal Bank of Scotland Capital adequacy ratio 12.66 12.50 Capital adequacy ratio - Tier I 7.43 7.94 Capital adequacy ratio - Tier

II5.23 4.56


Shinhan Bank


Societe Generale Capital adequacy ratio 22.47 22.77 Capital adequacy ratio - Tier I 22.08 21.96 Capital adequacy ratio - Tier II 0.39 0.81

Sonali Bank Capital adequacy ratio 20.31 20.03 Capital adequacy ratio - Tier I 20.10 19.81 Capital adequacy ratio - Tier

II0.21 0.22


Standard Chartered Bank


State Bank of Mauritius Capital adequacy ratio 38.01 34.40 Capital adequacy ratio - Tier I 35.52 31.91 Capital adequacy ratio - Tier II 2.49 2.49

UBS AG Capital adequacy ratio 229.37 157.86 Capital adequacy ratio - Tier I 229.37 157.83 Capital adequacy ratio - Tier

II0.03


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.

Capital Adequacy of Banks in India

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