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