Capital Adequacy of Banks in India PDF

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 banks 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 banks capital
base should consist of core capital.
In order to calculate CRAR, the banks 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

Capital Held by Commercial Banks in India
(2009 2010)
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 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
RBIs 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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Capital Adequacy of Banks

The Narasimhan committee endorsed the internationally

BCBS initiated Basel I norms in 1988, considered to be

In 1996 BCBS amended the Basel I norms

In 1999 it initiated a complete revision of the Basel I

In pursuance of the Narasimhan Committee

for commercial banks in 1992

the market risk amendment of Basel I in 1996

the revised norms of Basel II from March 2008

Basel II is a much more comprehensive framework of

Basel II stands on three pillars:

Revised and extensive framework for capital adequacy

Supervisory review (Pillar 2):

Provides key principles for supervisory review, risk management

Market discipline (Pillar 3):

Encourages market discipline by developing a set of disclosure

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.

State Bank of Bikaner and Jaipur

State Bank of Hyderabad

Capital adequacy ratio 14.25 13.39

State Bank of Indore

State Bank of Travancore

Capital adequacy ratio 14.03 13.74

Capital adequacy ratio 13.11 13.62

Capital adequacy ratio 13.22 13.62

Capital adequacy ratio 12.05 12.78

Central Bank of India

Indian Overseas Bank

Capital adequacy ratio 12.98 12.54

Punjab and Sind Bank

Capital adequacy ratio 14.35 13.10

Punjab National Bank

Capital adequacy ratio 14.03 14.16

Capital adequacy ratio 11.93 13.21

Union Bank of India

United Bank of India

Capital adequacy ratio 13.15 12.50

Capital adequacy ratio 11.50 7.52

Catholic Syrian Bank

City Union Bank

Capital adequacy ratio 11.65 14.91

Jammu & Kashmir Bank

Capital adequacy ratio 14.48 15.89

Capital adequacy ratio 13.48 12.37

Capital adequacy ratio 14.92 14.49

Lakshmi Vilas Bank

Capital adequacy ratio 10.29 14.82

Capital adequacy ratio 13.10 15.68

SBI Comm. & Intl. Bank

Capital adequacy ratio 21.24 27.31

South Indian Bank

Capital adequacy ratio 14.76 15.39

Tamilnad Mercantile Bank

Development Credit Bank

Kotak Mahindra Bank

Capital adequacy ratio 20.01 18.35

Capital adequacy ratio - Tier II 3.88 2.93

Capital adequacy ratio 16.60 20.60

Abu Dhabi Commercial Bank