CAPITAL ADEQUACY RATIO ASSIGNMENT (SESSION #3)

SUBMITTED BY: GROUP 4PRATIK GAOKAR (PGP13105)SAHIL DHINGRA (PGP13112)SAURAV GARG (PGP13052)SHITAL KUMAR (PGP13118)

CARCapital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted assetCapital adequacy ratio is defined as:

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)

TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts

where Risk can either be weighted assets () or the respective national regulator's minimum total capital requirement. If using risk weighted assets, CAR ≥ 10%.The per cent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries.Two types of capital are measured: tier one capital ( above), which can absorb losses without a bank being required to cease trading, and tier two capital ( above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

RISK WEIGHTINGSince different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.

Risk weighting

• Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by the national regulator to each such assets.

• Non-funded (Off-Balance sheet) Items : The credit risk exposure at tached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the Credit Conversion Factor. This will then have to be again multiplied by the relevant weightage.

Local regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.

EXAMPLE

Even though Bank would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.

PURPOSE OF CARCapital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.

Gross NPA : Principal part of the NPANet NPA : Principal + Interest Part of the NPANet NPA = Gross NPA - (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account +Total provisions held)

Gross Advances : Principal OutstandingNet Advances : Principal + Interest OutstandingGross Advances Ratio Vs Net Advances Ratio

INDIAN BANKS

REASONS FOR INCONSISTENCYOn rise in credit demand• The industry credit growth accelerated to 16.6 % a YOY basis to Rs which was more than the

Reserve Bank of India's (RBI) forecast of 15 % YOY growth in bank advances in 2013-14.

• Conversion of the excess statutory liquidity ratio (SLR)into loans as business picks up, the risk weights will further shift from government securities to corporate bonds, making the capital adequacy ratio look even worse.

NPA• Every increase in NPA level adds to risk weighted assets which warrant the banks to shore up

their capital base further. Capital has a price tag ranging from 12% to 18% since it is a scarce resource.

• CRAR falls to 13 per cent as of March 2014 from 13.88 per cent a year earlier

• Public-sector banks have been the worst hit : Avg CRAR falls to 10.67 per cent as of the quarter ended June, compared with 11.18 per cent in March.

• Gross non-performing assets (NPAs) of public-sector banks increased to 4.1 per cent as of the end of March from 3.6 per cent a year ago.

• Net NPA as a proportion of net advances were 2.2 per cent, compared with 1.7 per during the same period a year earlier

BASEL III

UNITED BANK OF INDIA (PSU)

UBI IN NEWS• Sudden exit of Archana Bhargava CMD, her voluntary retirement application being

accepted in 24 hours – Feb 2014

• Posted a loss of 1213.44 Cr in FY14

• Union Bank of India's wilful defaulter order - 03 Sep 2014

• Union Bank of India gains on plan to raise Rs 1,386 crore via QIP - 05 Sep 2014

• See gross NPAs below 4%, NIMs at 2.9% by FY15-e: Union Bank - 11 Sep 2014

• Carrot & Stick approach

Incentives on repayment of dues and agreed on compromised settlements, but also unsettling defaulters with legal notices and placing them in “wilful defaulters” list.

• One-time-settlement scheme for loans up to Rs 10 lakh, which expired on March 31, to facilitate easy repayment. 

• Promising fresh finances if the borrower repaid the dues.

STEPS TAKEN BY UBI

FY 2011 FY 2012 FY 2013 FY 20140

100000

200000

300000

400000

500000

600000

700000

488319.1011

560643.814624325.0429 610070

0

71145.7 72796.3 59810

Risk Weighted Assets

Risk Based Capital

We see here that the RWA increase sharply in 2012 but the risk based capital does not, which leads to a decline the CAR

UNITED BANK OF INDIA

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 20140

2

4

6

8

10

12

1413.28 12.8 13.05 12.69

11.669.81CAR

1 2 3 4 5 60123456789

10

7.568.16

8.9 8.79 8.4

6.54

Tier-1 Capital Ratio

United Bank of IndiaAs on 31st March 2013 (in Millions)

Gross NPA: 29638 Gross Advances: 697081Gross NPA /Gross Advance Ratio:4.25Internal Capital Growth Rate: -17.8%

INDUSIND BANK

2010 2011 2012 2013 201412.5

13

13.5

14

14.5

15

15.5

16

16.5

15.33

15.89

13.85

15.36

13.83

CAR

2010 2011 2012 2013 20140

2

4

6

8

10

12

14

16

9.65

12.2911.37

13.7812.71

Tier 1 Capital Ratio

IndusInd BankAs on 31st March 2013 (in Millions)

Gross NPA -- 4578Gross Advances -- 446416Gross NPA /Gross Advance Ratio– 1.03

2010 2011 2012 2013 20140

100000

200000

300000

400000

500000

600000

700000

800000

21399.9 37740.6 44576.681854.7 93050

221796.1

307160.3

392033.1

532834

672600

Risk Based Capital Risk Weighted Assets

RWA increases at a linear rate while risk based capital does not increase at the same rate which decreases the CAR of the bank.

INDUSIND BANK

• Exponentially increase in number of branches-650 branches by March 2014

• Increase in credit demand• Raised capital Rs 2000 Cr to comply with Basel norms• Net profit of 1408 Cr in FY14. (Up by 40%).• 70% increase In Share Price since Feb 2014.• Ratio of gross NPA to gross advances stood at 1.11% as on 30 June

2014 as against 1.12% as on 31 March 2014 and 1.06% as on 30 June 2013.

• Ratio of net NPAs to net advances stood at 0.33% as on 30 June 2014 same as 0.33% as on 31 March 2014 and 0.21% as on 30 June 2013.

INDUSIND BANK NEWS

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