A
DISSERTATION
ON
“capital adequacy ratio on credit risk in Indian private bank, with special
references to ICICI bank, HDFC bank and AXIS bank.
Submitted to
KURUKSHETRA UNIVERSITY, KURUKSHETRA
In the partial fulfillment for the degree ofMaster of Business Administration
(Session 2006-2008)Under the supervision of: Submitted by:MISS RUBY MITTAL VARUN JAINSENIOR FACULTY, MBA Uni. Roll. ………..
TIMT Roll No. 1169/06Regst. No. 03-DSK-411
Tilak Raj Chadha Institute of Management &Technology (Approved by AICTE & Affiliated to Kurukshetra University, Kurukshetra)
Yamuna Nagar-135001)
Executive Summary
To know about the Basel norms as well as their impact on the banking sector in India as these
norms are vary important for the banking industry of India as Indian banking faces the huge
credit, market an operation risk during their day to day operations.
Basel norms are going to be compulsory for Indian banks to be adopted by the end of
march 2008 and due to that the relevance of these norms have increases very high and Indian
banks have to understand the proper implications of the Basel norms provided by the bank
for international settlement’s committee for banking supervision.
Basel norms are earlier adopted by the ICICI bank and HDFC banks are the first Indian
banks to adopt the Basel norms of capital adequacy and they have their capital adequacy ratio
shown every year in their balance sheet according to the ranking and risk weighted provided
by the Basel committee for banking supervision to the assets of the bank
In India Basel norms are more important because of international banking situation as
International banking is facing the sub prime crisis due to credit and market risk so to
analyzing this risk in context of Indian banking is also very important.
AcknowledgementI take this opportunity to express my profound debts of gratitude and
obligation, to my esteemed guide Miss Rubby Mittal faculty of Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar, for her most valuable
help and creative suggestions at all stages of my work. Her learned advice and
guidance always kindled inspiration in the face of difficulties encountered in the
course of this research work.
I am also thankful to my mentor Dr vikas daryal, Director, Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar, for allowing me to
work on this project work and for his kind help always.
I am highly grateful to my all lecturers and dedicated staff of Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar for their kind help
from time to time.
.
(VARUN JAIN)
ContentsSerial No. Page No.
1. Certificate
2. Executive summary
3. Acknowledgement
4. Contents
5. Introduction
Profile of the study
Significance of the study
6. Objective of the study
7. Literature Review
8. Research Methodology
Sampling & Sample Design
Analytical Tools
Data Collection
Hypothesis Testing
Limitations of the study
9. Result & Discussions/Findings
10. Recommendation
11. Bibliography
12. Annexure
Industry profile
EVOLUTION OF BANKING IN INDIA
Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2,
1809), the first joint-stock bank sponsored by Government of Bengal and governed by the
royal charter of the British India Government. It was followed by establishment of Bank of
Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the
presidency banks, marked the beginning of the limited liability and joint stock banking in
India and were also vested with the right of note issue.
In 1921, the three presidency banks were merged to form the Imperial Bank of India, which
had multiple roles and responsibilities and that functioned as a commercial bank, a banker to
the government and a banker’s bank. Following the establishment of the Reserve Bank of
India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was
carrying out came to an end, leading it to become more of a commercial bank. At the time of
independence of India, the capital and reserves of the Imperial Bank stood at Rs 118 mn,
deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200
sub offices spread all over the country.
In 1951, in the backdrop of central planning and the need to extend bank credit to the rural
areas, the Government constituted All India Rural Credit Survey Committee, which
recommended the creation of a state sponsored institution that will extend banking services
to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of
India was established in Jul, 1955. In 1959, State Bank of India took over the eight former
state-associated banks as its subsidiaries. To further accelerate the credit to fl ow to the rural
areas and the vital sections of the economy such as agriculture, small scale industry etc., that
are of national importance, Social Control over banks was announced in 1967 and a National
Credit Council was set up in 1968 to assess the demand for credit by these sectors and
determine resource allocations. The decade of 1960s also witnessed significant consolidation
in the Indian banking industry with more than 500 banks functioning in the 1950s reduced to
89 by 1969.
For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization
of 14 major banks was announced that each had a minimum of Rs 500 mn and above of
aggregate deposits. In 1980, eight more banks were nationalised. In 1976, the Regional Rural
Banks Act came into being, that allowed the opening of specialized regional rural banks to
exclusively cater to the credit requirements in the rural areas. These banks were set up jointly
by the central government, commercial banks and the respective local governments of the
states in which these are located.
Indian banking, which experienced rapid growth following the nationalization, began to face
pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was
gearing up towards new prudential norms and operational standards pertaining to capital
adequacy, accounting and risk management, transparency and disclosure etc. In the early
1990s, India embarked on an ambitious economic reform programme in which the banking
sector reforms formed a major part. The Committee on Financial System (1991) more
popularly known as the Narasimham Committee prepared the blue print of the reforms. A
few of the major aspects of reform included (a) moving towards international norms in
income recognition and provisioning and other related aspects of accounting (b)
liberalization of entry and exit norms leading to the establishment of several New Private
Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lending
rates (except the saving deposit rate), (d) allowing Public Sector Banks access to public
equity markets for raising capital and diluting the government stake,(e) greater transparency
and disclosure standards in financial reporting (f) suitable adoption of Basel Accord on
capital adequacy (g) introduction of technology in banking operations etc. The reforms led to
major changes in the approach of the banks towards aspects such as competition, profitability
and productivity and the need and scope for harmonization of global operational standards
and adoption of best practices. Greater focus was given to deriving efficiencies by
improvement in performance and rationalization of resources and greater reliance on
technology including promoting in a big way computerization of banking operations and
introduction of electronic banking.
The reforms led to significant changes in the strength and sustainability of Indian banking. In
addition to significant growth in business, Indian banks experienced sharp growth in
profitability, greater emphasis on prudential norms with higher provisioning levels, reduction
in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp
growth in performance and profitability. Indian banking industry is preparing for smooth
transition towards more intense competition arising from further liberalization of banking
sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the
financial services industry.
Banking Industry at a Glance
In the reference period of this publication (FY06), the number of scheduled commercial
banks functioning in India was 222, of which 133 were regional rural banks. There are
71,177 bank XIV offices spread across the country, of which 43 % are located in rural areas,
22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas.
The major bank groups (as defined by RBI) functioning during the reference period of the
report are State Bank of India and its seven associate banks, 19 nationalised banks and the
IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.
Indian Banking at a Glance
Number of Banks, Group Wise
Group Wise: Comparative Average
Bank Groups: Key Indicators
Introduction to banks
Axis bank
Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and other
four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance
Company, The Oriental Insurance Corporation and United Insurance Company Ltd.
The Bank today is capitalized to the extent of Rs. 357.48 crore with the public holding (other
than promoters) at 57.03%.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.
Presently, the Bank has a very wide network of more than 608 branch offices and Extension
Counters. The Bank has a network of over 2595 ATMs providing 24 hrs a day banking
convenience to its customers. This is one of the largest ATM networks in the country.
The Bank has strengths in both retail and corporate banking and is committed to adopting the
best industry practices internationally in order to achieve excellence.
Notwithstanding the immense benefits that Internet Banking brings, the Bank also has other
distribution channels. At the end of December 2007, the Bank increased its reach to 363
cities, towns and villages across the country through 608 Branches & Extension Counters and
2595 ATMs. The Bank offers a complete range of retail and corporate services, including
retail loans, corporate and business credit, forex and trade finance services, investment
banking, depository services and investment advisory services. Our deposit base currently
stands at over Rs. 68,000 crores with over 77 lakh accounts.
Our Mission And Values
Our Mission
Customer Service and Product Innovation tuned to diverse needs of individual and
corporate clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
Efficiency and effectiveness built on ethical practices.
Core Values
Customer Satisfaction through
Providing quality service effectively and efficiently
"Smile, it enhances your face value" is a service quality stressed on
Periodic Customer Service Audits
Maximization of Stakeholder value
Success through Teamwork, Integrity and People
Promoters
Axis Bank Ltd. has been promoted by the largest and the best Financial Institution of the
country, UTI. The Bank was set up with a capital of Rs. 115 crore, with UTI contributing
Rs. 100 crore, LIC - Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5
crore each.
SUUTI - Shareholding 27.21%
Erstwhile Unit Trust of India was set up as a body corporate under the UTI Act, 1963,
with a view to encourage savings and investment. In December 2002, the UTI Act, 1963
was repealed with the passage of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002 by the Parliament, paving the way for the bifurcation of UTI into 2
entities, UTI-I and UTI-II with effect from 1st February 2003. In accordance with the Act,
the Undertaking specified as UTI I has been transferred and vested in the Administrator of
the Specified Undertaking of the Unit Trust of India (SUUTI), who manages assured
return schemes along with 6.75% US-64 Bonds, 6.60% ARS Bonds with a Unit Capital of
over Rs. 14167.59 crores.
The Government of India has currently appointed Mr K. N. Prithviraj as the Administrator
of the Specified undertaking of UTI, to look after and administer the schemes under UTI -
I, where Government has continuing obligations and commitments to the investors, which
it will uphold.
ICICI bank
ICICI Bank is
India's second-
largest bank
with total
assets of Rs.
3,767.00
billion (US$
96 billion) at
December 31,
2007 and
profit after tax
of Rs. 30.08
billion for the
nine months
ended
December 31,
2007. ICICI
Bank is
second
amongst all the companies listed on the Indian stock exchanges in terms of free float market
capitalization*. The Bank has a network of about 955 branches and 3,687 ATMs in India and
presence in 17 countries. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and through
its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. The Bank currently has subsidiaries in the
United Kingdom, Russia and Canada, branches in Unites States, Singapore, Bahrain, Hong
Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in
United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia.
Our UK subsidiary has established a branch in Belgium.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National
Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange (NYSE).
History
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering
in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by
ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses. In the 1990s,
ICICI transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In
1999, ICICI become the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's universal banking strategy.
The merger would enhance value for ICICI shareholders through the merged entity's access
to low-cost deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The merger
would enhance value for ICICI Bank shareholders through a large capital base and scale of
operations, seamless access to ICICI's strong corporate relationships built up over five
decades, entry into new business segments, higher market share in various business
segments, particularly fee-based services, and access to the vast talent pool of ICICI and its
subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the
merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal
Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The
merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High
Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at
Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI
group's financing and banking operations, both wholesale and retail, have been integrated in
a single entity.
HDFC bank
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in
the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994.
The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January 1995
HDFC is India's premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC
has developed significant expertise in retail mortgage loans to different market segments and
also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
HDFC Bank was incorporated in August 1994, and, currently has an nationwide network of
746 Branches and 1647 ATM's in 329 Indian towns and citiesThe authorised capital of
HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is Rs.311.9 crore (Rs.3.1
billion). The HDFC Group holds 22.1% of the bank's equity and about 19.4% of the equity is
held by the ADS Depository (in respect of the bank's American Depository Shares (ADS)
Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors (FIIs) and the
bank has about 190,000 shareholders. The shares are listed on the The Stock Exchange,
Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed
on the New York Stock Exchange (NYSE) under the symbol "HDB
Statement VII : Private
Sector Banks: Ratios
As on
Mar
capital
adequacy ratio
Net NPA to Net
Advances
Operating exp to
total exp
Sl.No
:BANKS 2003 2004 2005 2003 2004 2005 2003 2004 2005
NEW PRIVATE SECTOR
BANKS
01HDFC
Ban11.1211.66
12.1
60.37 0.16 0.24
28.069
17
40.078
18
45.206
92
02ICICI
Bank11.110.36
11.7
85.21 2.21 1.65
17.770
01
26.821
42
33.425
9
03Axis
Bank 10.911.21
12.6
62.39 1.29 1.39
19.181
87
29.098
47
32.765
62
Ratios of the banks
Axis Bank # HDFC Bank ICICI Bank
2006 2007 2006 2007 2006 2007
-1 -2 -21 -22 -23 -24
1 Cash-deposit ratio 6.06 7.93 5.93 7.59 5.41 8.12
2 Credit-deposit ratio 55.63 62.73 62.84 68.74 88.54 84.97
3 Investment-deposit ratio 53.67 45.75 50.89 44.75 43.34 39.59
4 (Credit Investment)-deposit ratio 109.29 108.49 113.73 113.49 131.88 124.56
5 Ratio of deposits to total liabilities 80.66 80.25 75.91 74.86 65.67 66.88
6 Ratio of term deposits to total deposits 60.02 60.14 44.55 42.32 77.28 78.22
7 Ratio of priority sector advances to total
advances
34.64 35.79 30.99 37.67 29.2 28.22
8 Ratio of term loan to total advances 70.29 69.74 73.59 76.25 76.48 77.22
9 Ratio of secured advances to total advances 89.88 86.64 69.16 71.08 83.01 79.77
10 Ratio of investments in non-approved
securities to total investments
45.33 39.26 30.84 26.24 28.61 26.18
11 Ratio of interest income to total assets 6.6 7.42 7.16 8.36 6.83 7.72
12 Ratio of net interest margin to total assets 2.47 2.55 4.08 4.5 2.25 2.23
13 Ratio of non-interest income to total assets 1.67 1.64 1.8 1.84 2 1.99
14 Ratio of intermediation cost to total assets 1.86 1.98 2.71 2.94 2.39 2.25
15 Ratio of wage bills to intermediation cost 29.51 31.4 28.79 32.09 21.64 24.16
16 Ratio of wage bills to total expense 9.15 9.06 13.45 13.87 7.41 7.01
17 Ratio of wage bills to total income 6.64 6.85 8.69 9.24 5.85 5.59
18 Ratio of burden to total assets 0.19 0.33 0.91 1.1 0.39 0.26
19 Ratio of burden to interest income 2.92 4.48 12.67 13.13 5.73 3.31
20 Ratio of operating profits to total assets 2.27 2.22 3.17 3.41 1.86 1.97
21 Return on assets 1.18 1.1 1.38 1.33 1.3 1.09
22 Return on equity 18.28 20.96 17.74 19.46 14.33 13.17
23 Cost of deposits 4.32 5.02 3.38 4.34 4.41 5.89
24 Cost of borrowings 2.7 4.29 8.24 9.66 2.57 2.9
25 Cost of funds 4.23 4.96 3.76 4.58 4.01 5.34
26 Return on advances 8.06 9.13 8.91 10.57 8.59 9.41
27 Return on investments 7.03 7.15 6.84 7.8 6.05 7.36
28 Return on advances adjusted to cost of
funds
3.83 4.17 5.15 5.99 4.58 4.08
29 Return on investments adjusted to cost of
funds
2.8 2.19 3.08 3.22 2.04 2.02
30 Business per employee (in Rs.lakh) 1020 1024 758 607 905 1027
31 Profit per employee (in Rs.lakh) 8.69 7.59 7.39 6.13 10 9
32 Capital adequacy ratio 11.08 11.57 11.41 13.08 13.35 11.69
33 Capital adequacy ratio - Tier I 7.26 6.42 8.55 8.57 9.2 7.42
34 Capital adequacy ratio - Tier II 3.82 5.15 2.86 4.51 4.15 4.27
35 Ratio of net NPA to net advances 0.98 0.72 0.44 0.43 0.72 1.02
Introduction of the study
Introduction
In its report submitted to the Government of India in December 1991, the
Narasimhan
Committee on Financial System suggested several reform measures for
India’s financial system. The Committee recommended gradual
liberalization of the banking sector by adopting measures such as
reduction of statutory preemptions, deregulation of interest rates and
allowing foreign and domestic private banks to enter the system. Along
with these, the Committee also recommended adoption of prudential
regulation relating to capital adequacy, income recognition, asset
classification and provisioning standards. While the liberalization was
aimed at bringing about competition and efficiency into India’s banking
system, the prudential regulation was aimed at strengthening the
supervisory system, which is important in the process of liberalization.
The Narasimhan Committee endorsed the internationally accepted norms
for capital adequacy standards, developed by the Basel Committee on
Banking Supervision (BCBS).2 BCBS initiated Basel I norms in 1988,
considered to be the first move towards risk-weighted capital adequacy
norms. In 1996 BCBS amended the Basel I norms and 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 and has committed to implement the
revised norms, the Basel II, from March 2008.
An overview of Basel I, market risk amendment of Basel I and
Basel II
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; and
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 lculate CRAR, the bank’s assets should be
weighted by five categories of credit risk – 0, 10, 20, 50 and 100 per
cent. For example, if an asset is in the form of cash or claims on central
governments, it will get a risk weight of zero, if it is in the form of a claim
on domestic public sector entities, then it will get a risk weight of 10, 20
or 50 per cent at the discretion of the national supervisory authority.
Claims on the private sector will get a risk weight of 100 per cent. Table
A1 in the Appendix provides the risk weights for different asset classes
under Basel I.
Risk weights of asset categories under Basel I
Introduction of Basel II norms
Basel II is the second of the Basel Accords, which are recommendations on banking laws
and regulations issued by the Basel Committee on Banking Supervision. The purpose of
Basel II, which was initially published in June 2004, is to create an international standard that
banking regulators can use when creating regulations about how much capital banks need to
put aside to guard against the types of financial and operational risks banks face. Advocates
of Basel II believe that such an international standard can help protect the international
financial system from the types of problems that might arise should a major bank or a series
of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk
and capital management requirements designed to ensure that a bank holds capital reserves
appropriate to the risk the bank exposes itself to through its lending and investment practices.
Generally speaking, these rules mean that the greater risk to which the bank is exposed, the
greater the amount of capital the bank needs to hold to safeguard its solvency and overall
economic stability.
The final version aims at:
1. Ensuring that capital allocation is more risk sensitive;
2. Separating operational risk from credit risk, and quantifying both;
3. Attempting to align economic and regulatory capital more closely to reduce the scope
for regulatory arbitrage.
While the final accord has largely addressed the regulatory arbitrage issue, there are still
areas where regulatory capital requirements will diverge from the economic.
Basel II has largely left unchanged the question of how to actually define bank capital, which
diverges from accounting equity in important respects. The Basel I definition, as modified up
to the present, remains in place.
The Accord in operation
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing
risk), (2) supervisory review and (3) market discipline – to promote greater stability in the
financial system.
The Basel I accord dealt with only parts of each of these pillars. For example: with respect to
the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while
market risk was an afterthought; operational risk was not dealt with at all.
The first pillar
The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces: credit risk, operational risk and market risk. Other risks
are not considered fully quantifiable at this stage.
The credit risk component can be calculated in three different ways of varying degree of
sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB
stands for "Internal Rating-Based Approach".
For operational risk, there are three different approaches - basic indicator approach or BIA,
standardized approach or STA, and advanced measurement approach or AMA.
For market risk the preferred approach is VaR (value at risk).
The second pillar
The second pillar deals with the regulatory response to the first pillar, giving regulators much
improved 'tools' over those available to them under Basel I. It also provides a framework for
dealing with all the other risks a bank may face, such as systemic risk, pension risk,
concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the
accord combines under the title of residual risk.
The third pillar
The third pillar greatly increases the disclosures that the bank must make. This is designed to
allow the market to have a better picture of the overall risk position of the bank and to allow
the counterparties of the bank to price and deal appropriately.
Basel II Event Type Categories
The following lists the official Basel II defined event types with some examples for each
category:
Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of
positions, bribery
External Fraud - theft of information, hacking damage, third-party theft and forgery
Employment Practices and Workplace Safety - discrimination, workers compensation,
employee health and safety
Clients, Products, & Business Practice - market manipulation, antitrust, improper
trade, product defects, fiduciary breaches, account churning
Damage to Physical Assets - natural disasters, terrorism, vandalism
Business Disruption & Systems Failures - utility disruptions, software failures,
hardware failures
Execution, Delivery, & Process Management - data entry errors, accounting errors,
failed mandatory reporting, negligent loss of client assets
Capital requirement
The capital requirement is a bank regulation, which sets a framework on how banks and
depository institutions must handle their capital. The categorization of assets and capital is
highly standardized so that it can be risk weighted. Internationally, the Basel Committee on
Banking Supervision housed at the Bank for International Settlements influence each
country's banking capital requirements. In 1988, the Committee decided to introduce a capital
measurement system commonly referred to as the Basel Capital Accords (Basel Accord).
This framework is now being replaced by a new and significantly more complex capital
adequacy framework commonly known as Basel II. While Basel II significantly alters the
calculation of the risk weights, it leaves alone the calculation of the capital. The capital ratio
is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-
sensitivity ratios whose calculation is dictated under the relevant Accord.
Each national regulator normally has a very slightly different way of calculating bank capital,
designed to meet the common requirements within their individual national legal framework.
Brazil limits bank lending to 10 times the bank's capital, adjusted to inflation . Most
developed countries and Basel I and II, stipulate lending limits as a multiple of a banks
capital eroded by the yearly inflation rate.
The 5 C's of Credit, Character, Cash Flow, Collateral, Conditions and Capital, have been
substituted by one single criterion. While the international standards of bank capital were laid
down in the 1988 Basel I accord, Basel II makes significant alterations to the interpretation,
if not the calculation, of the capital requirement.
Examples of national regulators implementing Basel II include the FSA in the UK, BAFIN in
Germany, and OSFI in Canada.
An example of a national regulator implementing Basel I, but not Basel II, is in the United
States. Depository institutions are subject to risk-based capital guidelines issued by the Board
of Governors of the Federal Reserve System (FRB). These guidelines are used to evaluate
capital adequacy based primarily on the perceived credit risk associated with balance sheet
assets, as well as certain off-balance sheet exposures such as unfunded loan commitments,
letters of credit, and derivatives and foreign exchange contracts. The risk-based capital
guidelines are supplemented by a leverage ratio requirement. To be adequately capitalized
under federal bank regulatory agency definitions, a bank holding company must have a Tier
1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a
leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to
meet and maintain specific capital levels. To be well-capitalized under federal bank
regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at
least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at
least 5%, and not be subject to a directive, order, or written agreement to meet and maintain
specific capital levels. These capital ratios are reported quarterly on the Call Report or Thrift
Financial Report.
Common capital ratios
Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets
Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 and Tier 2) / Risk-
adjusted assets
Leverage ratio = Tier 1 capital / Average total consolidated assets
Common stockholders’ equity ratio = Common stockholders’ equity / Balance sheet
assets
RBI’s Risk-weights for SA of Basel II: Claims on Foreign Entities
CAPITAL ADEQUACY RATIO
The capital adequacy ratio is expressed as a percentage market risk and
operational risk, the capital charge calculated using any one of the above
methods is multiplied by 12.5 [For Rs 8 capital the RWA is 100 and hence the
multiplying factor is 12.5 (100/8)] so as to bring it at par with the risk-weighted
asset for credit risk. Thus, the Capital Adequacy Ratio, under the Capital
Accord II, can be expressed as follows:
Types of funded risk assets Risk weights%
Cash ad balance with RBI
Loans and advances guaranteed by
state and central government 0.00%
SSI advances guaranteed by credit
guarantee fund trust for small
industries up to guaranteed portion.
Advance against term deposits, LIC
policies, NSC’s, IVP’s, and KVP’s.
Income tax deducted at sources(net of
provisions)
Interest due on government securities.
Accrued interest on CRR.
Investment in government securities.
2.50%
Investment in other approved securities
guaranteed by state or central
government.
Investment in other securities where
payment of interest and repayment of
2.50%
loan is guaranteed by central
government.
Balance in current account with other
banks.
Claims on banks and public financial
institution.
Loan and advances guaranteed to staff
of banks which are fully covered by
superannuation benefits.
Takeout finance: unconditional take
over where fully credit risk is assumed
by the taking over institutions.
20.00%
Investment in other approved securities
of government undertaking, which do
not form part of the approved market
borrowing programme
.claims on commercial banks and public
finance institutions.
Investments in bonds issued by other
banks.
Investments in securities, which are
guaranteed by banks as to payments of
interest and repayment of principal.
22.50%
Advances covered by DICGC/ECGC.
Housing loans to individuals against the
mortgage of housing properties. 50.00%
Loan guaranteed to public sector
undertaking of government of India.
Loan guaranteed to public sector
undertaking of state government.
Foreign exchange open position.
Open position in gold.
Premises, furniture and fixture.
All other assets. 100%
Investment in subordinated debt
instruments and bonds issued by other
banks or public finance institutions for
tier II capital.
Deposited placed with SIDBI, NABARD
in lieu of short fall In lending to priority
sector.
All other investments.
102.50%
Risks for witch the Basel II have been introduced
CREDIT RISK
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit
(either the principal or interest (coupon) or both).
Faced by lenders to consumers
Most lenders employ their own models (Credit Scorecards) to rank potential and existing
customers according to risk, and then apply appropriate strategies. With products such as
unsecured personal loans or mortgages, lenders charge a higher price for higher risk
customers and vice versa. With revolving products such as credit cards and overdrafts, risk is
controlled through careful setting of credit limits. Some products also require security, most
commonly in the form of property.
Faced by lenders to business
Lenders will trade off the cost/benefits of a loan according to its risks and the interest
charged. But interest rates are not the only method to compensate for risk. Protective
covenants are written into loan agreements that allow the lender some controls. These
covenants may:
limit the borrower's ability to weaken his balance sheet voluntarily e.g., by buying
back shares, or paying dividends, or borrowing further.
allow for monitoring the debt requiring audits, and monthly reports
allow the lender to decide when he can recall the loan based on specific events or
when financial ratios like debt/equity, or interest coverage deteriorate
.
Faced by business
Companies carry credit risk when, for example, they do not demand up-front cash payment
for products or services. By delivering the product or service first and billing the customer
later - if it's a business customer the terms may be quoted as net 30 - the company is carrying
a risk between the delivery and payment.
Significant resources and sophisticated programs are used to analyze and manage risk. Some
companies run a credit risk department whose job is to assess the financial health of their
customers, and extend credit (or not) accordingly. They may use in house programs to advise
on avoiding, reducing and transferring risk. They also use third party provided intelligence.
Companies like Moody's and Dun and Bradstreet provide such information for a fee.
For example, a distributor selling its products to a troubled retailer may attempt to lessen
credit risk by tightening payment terms to "net 15", or by actually selling fewer products on
credit to the retailer, or even cutting off credit entirely, and demanding payment in advance.
Such strategies impact sales volume but reduce exposure to credit risk and subsequent
payment defaults.
Faced by individuals
Consumers may face credit risk in a direct form as depositors at banks or as
investors/lenders. They may also face credit risk when entering into standard commercial
transactions by providing a deposit to their counterparty, e.g. for a large purchase or a real
estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are
exposed to the credit risk of their employer.
OPERATIONAL RISK
According to §644 of International Convergence of Capital Measurement and Capital
Standards, known as Basel II, operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people and systems, or from external events.
Although the risks apply to any organisation in business it is of particular relevance to the
banking regime where regulators are responsible for establishing safeguards to protect
against systemic failure of the banking system and the economy. The Basel II definition
includes legal risk, but excludes strategic risk: i.e. the risk of a loss arising from a poor
strategic business decision. This definition also excludes reputational risk (damage to an
organisation through loss of its reputation or standing) although it is understood that a
significant but non-catastrophic operational loss could still affect its reputation possibly
leading to a further collapse of its business and organisational failure.
MARKET RISK
Market risk is the risk that the value of an investment will decrease due to moves in market
factors. The four standard market risk factors are:
Equity risk, or the risk that stock prices will change.
Interest rate risk, or the risk that interest rates will change.
Currency risk, or the risk that foreign exchange rates will change.
Commodity risk, or the risk that commodity prices (i.e. grains, metals, etc.) will change.
As with other forms of risk, market risk may be measured in a number of ways.
Traditionally, this is done using a Value at Risk methodology. Value at risk is well
established as a risk management technique, but it contains a number of limiting assumptions
that constrain its accuracy. The first assumption is that the composition of the portfolio
measured remains unchanged over the single period of the model. For short time horizons,
this limiting assumption is often regarded as acceptable. For longer time horizons, many of
the transactions in the portfolio may mature during the modeling period. Intervening cash
flow, embedded options, changes in floating rate interest rates, and so on are ignored in this
single period modeling technique.
Justification of the study
The Basel Committee formulates broad supervisory standards and guidelines and
recommends statements of best practice in banking supervision in the expectation that
member authorities and other nations' authorities will take steps to implement them through
their own national systems, whether in statutory form or otherwise.
The main reason of adopting that study is the increasing of the credit risk to banks
after the sub-prime crises in UNITED STATES OF AMERICA.
Private sector banks are growing very fastly and they are exposing themselvesas well
as ignoring the credit risk.
Government of india have made it compulsury to adopt the BASEL II accord by the
end of march 31,2008.
BASEL II accord will increase the effeciency and the discipline in indian banking
sector.
Conversion of indian bank into the global financial gientand due to that the risk for
those banks have increased at their peack level.
Objective of the study
Capital adequacy standards form an integral part of prudential banking sector regulation.
Capital standards all over the world are converging at the behest of the Basel Committee on
Banking Supervision towards the so called Basel II norms. This paper elaborates on the
Indian experience.
Main objectives
To know the current situation of capital adequacy ratio in Indian private sector bank
and to understand the implication of capital adequacy ratio according to Basel accord
II
Secondary objectives
To know the methods of the calculating the capital adequacy ratio.
To know the ratings given by Basel committee of banking supervision on various
type of loans and to various parties to curb the capital risk.
To know the credit, operational and market risk.
Literature review
RESEARCH METHODOLOGY
Research Methodology is a way to systematically solve the research problem, which is a
science of study how research is done scientifically. Thus research methodology
encompasses the research methods or techniques; the research is capable of being evaluated
either by the researcher himself or by others.
SAMPLING
Sampling may be defined as the selection of some parts of an agreement or totality
for the purpose of study. All the items in any field of inquiry constitute a universe or
population, a complete enumeration of all the items in the population is known as
Census inquiry. But when the field of inquiry is large this method becomes difficult
to adopt because of the limited no. of resources involved in the case sample survey
method is chosen under which units are selected in such a way that they represent the
entire universe.
SAMPLING DESIGN
CENSUS METHOD : - All the items in any field of inquiry constitute a ‘Universe’
or ‘Population’. A complete enumeration of all the items in the ‘Population’ is known
as a Census inquiry. It can be presumed that in such an inquiry, when all items are
covered, no element of chance is left and highest accuracy is obtained. But in
practical it is not true in all cases. This type of inquiry involves a great deal of time,
money and energy. Therefore, when the field of inquiry is large, this method becomes
difficult to adopt because of the resources involved.
SAMPLING METHOD :- When field studies are undertaken in practical life,
consideration of time and cost almost invariably lead to a selection of respondents i.e.
selection of only few items. The respondent selected should be as representative of
total population. These respondents constitute what is technically called a ‘Sample’
and the selection process is called ‘Sampling Technique’. The survey so conducted is
known as ‘Sample Survey’.
Implementation of Sample Design: - A sample design is a definite plan for obtaining a
sample from a given population. It refers to the technique or the procedure the researcher
would adopt in selecting items for the sample. Sampling design may as well lay down the
number of items to be included in the sample i.e. the size of sample. Sample design is
determined before the data are colleted.
Steps In Sampling Design :- While developing a research design following
items are taken into consideration:-
I. Type of universe: - First and the foremost step is to clearly define the
universe to be studied. As I have taken the private banking sector of India.
II. Sampling unit: - A decision has to be taken concerning a sampling unit
before selecting sample. Here my sample unit includes the three main
private banks ICICI, HDFC and AXIS bank.
III. Size of sample: - This refers to the number of items to be selected from
the universe to constitute a sample. Here I have taken the sample of 3 year
balance sheets of those banks.
IV. Sampling procedure: - Finally the technique of selecting the sample is to
be dealt with. That means through which method the sample has been
collected. There are various types of selecting the sample. This includes
the current three year balance sheet and the profit and loss account and
their position of capital adequacy.
DATA COLLECTION METHOD
In the data collection method different methods are adopted for primary data collection and
secondary data collection.
PRIMARY DATA COLLECTION
Primary data is the data which is collected through observation or direct
communication with the respondent in one form or another. These are several
methods for primary data collection like Observation method, Interview method,
through schedule, through questionnaires and so on.
But as time was limited so, the relevant data was collected from the selected units by
adopting and arranging personal interview with the shopkeeper and dealer along with
a pre structured questionnaire. In this method I thank the views of shopkeepers and
dealer through the use of questionnaire and general interview.
SECONDARY DATA COLLECTION
The company’s past database is taken into reference along With company
brochures.
Analytical tool
Calculation of CAR
TIER I + TIER II + TIER III
Formula of CAR =
TOTAL RISKY WEIGHTED ASSETS
CAR = 246632644000 + 512560263000 * 100
8339676762558
CAR = 759192907000 * 100 = 9.10%
8339676762558
CorrelationOne of the Statistical tool which I am going to apply in my project i.e. correlation.
Correlation is their when change in the value of one variable influences the change in the
value of other variable.
“The statistical tool with the help of which relationship between two or more than two variables are studied is called correlation”
It refers to the techniques used in measuring the closeness of the relationship between the variables.
“Correlation analysis deals with the association between two or more variables.”
Coefficient of Correlation =
r = Nfdxdy - fdxfdy
Nfdx2-(fdx)2 Nfdy2-(fdy)2
HDFC BANK
Year Profit CAR
2005 114145 13.08
2006 87078 11.41
2007 66556 10.91
Co-efficient of correlation = 0.975339
114145
87078
66556
13.08 11.41 10.910
20000
40000
60000
80000
100000
120000
1 2 3
Profit
CAR
Interpretation: by the above diagram we can see that here is a positive correlation
between profit of the bank and the capital adequacy ratio and that correlation is 0.97 which is
highly positive correlation.
ICICI BANK
Year Profit CAR
2005 3404 13.35
2006 2728 11.69
2007 1957 10.07
Co-efficient of correlation = 0.998991
3404
2728
1957
13.35 11.69 10.070
1000
2000
3000
4000
1 2 3
Profit
CAR
Interpretation: by the above diagram we can see that here is a positive correlation
between profit of the bank and the capital adequacy ratio and that correlation is 0.99 which is
highly positive correlation.
AXIS BANK
Year Profit CAR
2005 334 11.03
2006 485 11.57
2007 659 11.08
Co-efficient of correlation = 0.043034
334
485
659
11.03 11.57 11.080100200300400500600700
1 2 3
Profit
CAR
Interpretation: by the above diagram we can see that here is not a positive correlation
between profit of the bank and the capital adequacy ratio and that correlation is 0.043 which
not at all significant and AXIS bank is not like ICICI and HDFC bank.
Hypothesis Testing( By applying t-test)
H0 =
Statistical tools
ANOVA
Analysis of variance (ANOVA) uses the same conceptual framework as linear regression.
The main difference comes from the nature of the explanatory variables: instead of
quantitative, here they are qualitative. In ANOVA, explanatory variables are often called
factors. The hypotheses used in ANOVA are identical to those used in linear regression: the
errors ei follow the same normal distribution N(0,s) and are independent.
The way the model with this hypothesis added is written means that, within the framework of
the linear regression model, the yis are the expression of random variables with mean µi and
variance s².
To use the various tests proposed in the results of linear regression, it is recommended to
check retrospectively that the underlying hypotheses have been correctly verified. The
normality of the residues can be checked by analyzing certain charts or by using a normality
test. The independence of the residues can be checked by analyzing certain charts or by using
the Durbin Watson test.
AXIS bank and CAR
Year Profit CAR
2005 334 11.03
2006 485 11.57
2007 659 11.08
XLSTAT 2008.2.03 - Linear regression - on 3/28/2008 at 1:04:23 AM
Y / Quantitative: Workbook = Book1 / Sheet = Sheet1 / Range = Sheet1!$B$1:$B$4 / 3 rows and 1 column
X / Quantitative: Workbook = Book1 / Sheet = Sheet1 / Range = Sheet1!$C$1:$C$4 / 3 rows and 1 column
Confidence interval (%): 95
Summary statistics:
Variable ObservationsObs. with missing
dataObs. without missing data Minimum Maximum Mean
Std. deviation
Profit 3 0 3 334.000 659.000 492.667 162.636
CAR 3 0 3 11.030 11.570 11.227 0.298
Regression of variable Profit:
Goodness of fit statistics:
Observations 3.000Sum of weights 3.000
DF 1.000
R² 0.002
Adjusted R² -0.996
MSE 52802.700
RMSE 229.788
MAPE 25.042
DW 1.014
Cp 2.000
AIC 33.327
SBC 31.524
PC 4.991
Analysis of variance:
Source DFSum of squares Mean squares F Pr > F
Model 1 97.966 97.966 0.002 0.973
Error 1 52802.700 52802.700Corrected Total 2 52900.667
Computed against model Y=Mean(Y)
Model parameters:
Source ValueStandard
error t Pr > |t|
Lower bound (95%)
Upper bound (95%)
Intercept 229.338 6114.906 0.038 0.976 -77467.915 77926.591
CAR 23.456 544.549 0.043 0.973-
6895.692 6942.603
Equation of the model:
Profit = 229.3380756271+23.4556345937856*CAR
Standardized coefficients:
Source Value Standard error t Pr > |t|
Lower bound (95%)
Upper bound (95%)
CAR 0.043 0.999 0.043 0.973 -12.651 12.737
Predictions and residuals:
Observation Weight CAR ProfitPred(Profit
) ResidualStd.
residual
Std. dev. on pred.
(Mean)
Lower bound 95%
(Mean)
Upper bound 95%
(Mean)
Std. dev. on pred.
(Observation) Lower bound 95% (Observation)
Obs1 1 11.030 334.000 488.054 -154.054 -0.670 170.500-
1678.350 2654.458 286.134
Obs2 1 11.570 485.000 500.720 -15.720 -0.068 229.250-
2412.178 3413.618 324.589
Obs3 1 11.080 659.000 489.227 169.773 0.739 154.854-
1478.376 2456.829 277.096
Regression of Profit by CAR (R²=0.002)
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
11 11.1 11.2 11.3 11.4 11.5 11.6
CAR
Pro
fit
Active Model
Conf. interval (Mean 95%) Conf. interval (Obs. 95%)
Standardized residuals / CAR
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
11 11.1 11.2 11.3 11.4 11.5 11.6
CAR
Sta
nd
ard
ized
res
idu
als
Profit / Standardized residuals
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
300 350 400 450 500 550 600 650 700
Profit
Sta
nd
ard
ized
res
idu
als
Pred(Profit) / Standardized residuals
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
485 490 495 500 505
Pred(Profit)
Sta
nd
ard
ized
res
idu
als
Pred(Profit) / Profit
300
350
400
450
500
550
600
650
700
300 350 400 450 500 550 600 650 700
Pred(Profit)
Pro
fit
Interpretation
At the confident interval of 95% the mean is 492 and standard deviation is162 in case of
profit of the Axis bank and in case of CAR the mean and standard deviation reduces to 11.22
and .92 which shows that the CAR is dependant variable and profit is independent variable.
FINDINGS
CAPITAL REQUIREMENT: The new norms will almost invariably increase capital
requirements in all banks across the board. although capital requirement for the credit risk
may for down due to adoption of more risk sensitive models such advantage will additional
capital charge for the operational risk and increased capital requirement for market risk
offset, ore than as given by the NSE data for the period from 31 march 2006 to 31 December
2005 Indian banks raised more than 13100crores rs for their tier I, II capital requirement.
PROFITABILITY: Completion amount banks for highly rated corporate needing lower
amount capital may exert pressure on already thinning interest spread.
RISK MANAGEMENT ARCHITECTURE: The new standards are amalgam of international
best practices and call for introduction of advanced risk management system with wide
application throughout the organization.
CHOICE OF ALTERNATIVE APPROACHES: The new framework provides for alternative
approaches for computation of capita requirement of various risks however the competitive
advantage of the internal rating based approach may lead to domination of this approach
among big banks.
CALCULATION OF RISKY WEIGHTED ASSETS: during my study I have try to
calculate the CAR of ICICI bank but it was not according to what the bank have shown so
there should be a transparent system to calculate the CAR
ABSENCE OF HISTORICAL DATABASE: Computation of profitability of default, loss
given default, migration mapping and supervisory validation require creation of historical
database, which is a time consuming process and may require initial support from supervisor.
CORPORATE GOVERNANCE ISSUE: Basel II proposal underscores the interaction
between sound risk management practice and corporate good governance. The bank board of
directors has the responsibility for the setting the basic tolerance of various types of risks.
NATIONAL DISCRETION: Basel II norms set out a number of areas were national
supervisor will need to determine the specific approaches, definition or thresholds that they
wish to adopt in implementing the proposals
DISCLOSURE REGIME: Pillar 3 purports to enforce market discipline through stricter
disclosure requirement while admitting that such disclosure may be useful for supervisory
authority and rating agencies, the expertise and ability of general public to comprehend and
interpret disclosed information is open to question.
EXTERNAL AND INTERNAL AUDITORS: The working group set up by the BASEL
committee to look into Implementation issue observed that supervisors may wish to involve
third parties, such as external auditors, internal auditors, and consultants to assist them in
carrying out some of the duties under Basel II.
SUGGESTIONS
.Banks should be instructed to monitor the total amount of loans to connected and
related parties and introduce an independent credit administration process. Limits on
aggregate exposures to connect and related parties by a bank need to be established.
Advanced risk management capabilities must be in place in all banks latest by the end
of the financial year 2002-2003. Central bank may assist banks in hastening
introduction of the more scientific and sophisticated risk management systems.
Banks should be required to incline a statement on their risk management policies and
procedures in their publicity available documents.
The regulators must undertake a more formal and rigorous assessment of the boards
performance. The regulator should adopt rating of the boards performance with the
provision that, if the rating falls below a certain specified level, prompt corrective
action should be triggered.
In the context of globalization and ever increasing domestic and cross border flows of
funds the implementation of Know Your Customer guidelines should be verified by
the supervisor and adherence thereto made more stringent.
Quality of management needs to be given greater weightage in supervisory
assessments.
Central bank may consider introducing meetings with banks boards and external
auditors in the interest of greater involvement of the board with supervisory concerns
and actions in order to enrich the scope of examination of banks.
The move towards consolidated accounting and supervision needs to be expedited.
Steps need to be taken so that necessary legal provisions are introduced and banks are
required to prepare consolidated accounts.
Conclusion
In Indian environment, as the regulator of private sector banks, the RBI provided capital in
good measure mainly to weaker banks. In doing so the RBI was not acting as a prudent
regulator as the return on and the return of such capital was never a consideration.
Moreover, capital infusion did not result in any cash flow to the receiver, as the capital was
reinvested in government securities yielding low interest. Receipt of capital was just a book
entry with advantage of interest income from the securities. It is said that globalization is
nothing but producing a product where it is cost effective, funding it where it is cheapest &
selling it where it is highly profitable. The risk management system should align itself to this.
There is no finite end to improve efficiency and profitability through; loss reduction and loss
preventive measures. The financial system has to cope constantly with changes in the broader
environment in which it operates and face the new challenges that those developments
impose on it. Subsequent to nationalization of banks, capitalization in banks was not given its
due importance as it was not felt necessary for the reason that the ownership of the banks
rested with government, creating the required confidence in the mind of public. Combined
forces of globalization and liberalization compelled the public sector banks, hither to protect
from the vagaries of market forces, to come to terms with the market realities where certain
minimum capital adequacy has to be maintained in the face of stiff norms in respect of
Income Recognition, Asset classification and Provisioning. It is clear that multi-pronged
approach would be required to meet the challenges of maintaining capital at adequate levels
in the face of mounting risks in the banking sector. Hence the adoption of capital structure
with reference to Basel II by the Indian banks would pay way for better movement towards
globalization.
BIBLIOGRAPHY
1. www.themanagementor.com/enlightenmentorareas/finance/FIFS/CapiAdeq.htm
2. www.rediff.com/money/2004/aug/03perfin.htm
3. www.indiastat.com/india/ShowData.asp?secid=32371&ptid=178&level=3
4. www.banknetindia.com/board/974.html
5. www.moneycontrol.com/mccode/news/searchresult.php?search_str=Capital
%20Adequacy%20Ratio
6. rbidocs.rbi.org.in/rdocs/Publications/PDFs/81507.pdf
7. economictimes.indiatimes.com/.../
Basel_II_norms_could_pave_a_sound_banking_system/articleshow/2863543.cms
8. www.bis.org.in/bis/start.htm
9. exim.indiamart.com/act-regulations/bis-regulations-1988.html
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