Indian banks show increase in capital adequacy
By Ankit Sharma
Jun 12, 2009
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A recent study by the ASSOCHAM Financial Pulse, namely "Indian Banking Sector : Capital Adequacy under Basel II", reveled the average capital adequacy ratio (CAR) of 10 Indian commercial banks increased by a 13.48 percent in FY08/09, against the 12.35 percent during the last fiscal as per the Basel II norms.

The names include, Bank of Baroda, State Bank of Bikaner and Jaipur, State Bank of Mysore, Indian Overseas Bank, Indian Bank, Bank of India, UCO Bank, Syndicate Bank, Punjab National Bank and State Bank of Travancore.

This improvement indicates the fundamental soundness of the Indian banks over institutions alike globally, especially during the tough economic times. The capital adequacy ratios of the banks were revealed in the financial results for the year ended March 2009, have shown considerable improvement as per the both Basel I and Basel II norms set for the banking industry.

Sajjan Jindal, President ASSOCHAM, said, "Average increase of 1.13 percentage points in CAR demonstrates the soundness and resilience of Indian banking sector."

He added that, ‘despite the global meltdown and big bank's failure in developed countries, Indian banking sector has remained unaffected as CAR of banks show signs of improvement in compliance with even more rigorous Basel II norms in FY 08-09.'

The minimum capital to risk-weighted asset ratio (CRARmin) in India is 9 per cent. This figure is only one percentage point above the actual Basel II norm. Earlier, the government took a sum of USD 3 billion from the World Bank and injected the funds in banks where the capital adequacy ratio (CAR) below 12 percent.

In a recent meeting between the Union Finance Minister, Pranab Mukherjee and the top executives of public sector banks (PSBs), the issue of capitalization of banks was importantly held. The minister asked the bankers to reduce lending rates (link news News 2_Reduce lending rates, Pranab tells banks.doc), increase the credit exposure based on the strong underlying capital.

In 1988, the committee issued Basel-I covering the credit risks. It was amended in 1996, to cover market risk of trading portfolios, however it is too simplistic to comprehend the market complexities. Hence, the committee came up with the Basel II accords in Jun 2004. The Basel-II accord has three pillars: minimum capital requirement based on the risk profile of a bank, supervisory review of banks by RBI if they go for internal ranking and instilling market discipline.

Established in 1920, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) is the apex body comprising of over 2 lakh companies and professionals as its members. The organisation interfaces with the government and international institutions to promote the interests of trade and industry.

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