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Knowledge At MET

Knowledge At MET

Capital Adequacy in Indian Banks with Reference to Basel Norms

Currently the Indian Economy is going through turbulence, due to high inflation and high interest rates. So too, the industrial sector is presently facing recession. RBI is taking corrective measures to revive the growth of financial services in the Banking Sector. Under such circumstances, the introduction of Basel III Norms by BIS will definitely have a significant impact on the growth of the Banking Sector. Hence this study has been undertaken to find out the application of Basel II Norms and the present status of CRAR in the Indian Banking Sector, so as to understand the possibilities of Basel III Norms and their repercussion on the additional capital requirement, to meet proposed the Norms.

Keywords

Basel Norms, Capital Adequacy, Profitability & Liquidity , Private Sector Banks, PSU Banks, Financial Growth, Tier I, Risk Management.

List of Abbreviations used- ATM – Automated Teller Machine BAI – BASEL Application Index

BIS – Bank of International Settlement

CRAR – Capital to Risk (Weighted) Assets Ratio CV – Covariance

NPA – Non Performing Assets PSU – Public Sector Units

Pvt. – Private

PE – Probable Error

SD – Standard Deviation SE – Standard Error

BASEL Norms

BASEL Norms are a set of precautionary measures imposed on banks and are made to protect the economy from financial crises, similar to that seen in recent years. Principally, they aim to ensure that banks accept a level of responsibility, for the financial economy, they operate within, and to act as a safeguard, against any further collapse. The world’s banking sector is involved in an obligatory fight to qualify under the package of reforms, known as Basel III, designed to eliminate – or at least greatly reduce – the danger of another financial crisis. Produced by the Bank for International Settlements – the ‘Central Bankers’ Bank’ – based in Basel, Switzerland, they are intended to make the world’s banks – and especially the systemically important institutions known as Sifis

– stronger and safer. These far-reaching global standards must be fully implemented by 2019.

The Bank of International Settlement (BIS), which initiated these norms, was established in 1974. The prime goals were twofold -

  1. Safety of Depositor’s Money (i.e. safety and soundness of Banks)
  2. Creating a level playing field for Banks across the globe(i.e. through each Bank’s strengths , rather than by relying on differences in each country’s rules)

The first Basel Accord was established in 1988 and implemented in 1992. It was a maiden effort in introducing the Capital Adequacy Ratio in the Bank’s balance sheet. The next accord - Basel II was proposed in 1999; a final directive was given in 2004 and implemented by 2009.

The fundamental objectives to revise the Accord were :

  • To develop a framework that would strengthen the soundness and stability of the International Banking
  • To ensure that it does not become a source of competitive inequality among internationally active Banks and yet have a Capital Adequacy Regulation that is sufficiently
  • To help promote the adoption of stronger risk management practices in the Banking

As BIS points out, it was the interconnectedness and vulnerability of the sector that precipitated the crisis. “One of the main reasons the economic and financial crisis became so severe was that the banking sectors of many countries had built up excessive on and off-balance sheet leverage ...This was accompanied by a gradual erosion of the level and quality of the capital base. At the same time, many banks were holding insufficient liquidity buffers. The banking system therefore was not able to absorb the resulting systemic trading and credit losses.”

Overall, the purpose of Basel III Norms, which were first created in 2010 and modified in late 2011, is to ensure that the financial sector remains in a strong position, to fulfil its primary function – that of providing credit to individuals and businesses alike. “ The objective of the reforms is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy,” says the BIS.

Although highly technical, the principle underlying Basel III is clear and simple. Namely, the financial community is there to serve the broader economic community. “A strong and resilient banking system is the foundation for sustainable economic growth, as banks are at the centre of the credit intermediation process, between savers and investors,” Basel III points out. “Banks provide critical services to consumers, small and medium-sized enterprises, large corporate firms and governments, who rely on them to conduct their daily business, both at a domestic and international level.”

Objective of the Study

Banks have lobbied against some aspects of the reforms, arguing that some of the capital and liquidity requirements are too severe. They say that the requirements may force them to reduce their ability to provide credit to the industry and may result in an increase in costs to customers, because they will have to tie up large amounts of low-yielding capital in regulatory buffers, especially in India, where banks have to follow relatively more conservative and strict RBI guidelines. Therefore, the study of application of Basel II Norms will help estimate the impact of changes, prescribed in Basel III.

Hence, the objective of this study is to understand Basel Norms, with reference to Capital Adequacy, their application and their relationship with other important variables, which have a direct impact on the profitability and sustainability of the Bank.

Research Design and Sample Selection

The research design adopted is Exploratory Research. With the help of a sample, representing the leading Banks of India, an attempt has been made to find out the application of BASEL Norms, in the Indian Banking Sector. The Indian Banking Sector is dominated by two types of Sectors – Public Sector Banks and Private Sector Banks. Hence, the sample under scrutiny has been drawn from both the Sectors. Large Banks have been selected on the basis of their Balance Sheet size, performance and goodwill - 5 Public Sector Banks and 6 Private Sector Banks have been selected for the study.

These Banks have been selected from the Nifty Bank Index.

Data Collection and Analysis

For the purpose of the study, data was collected from various secondary sources, such as websites of the respective Banks, the Reserve Bank of India and the Bank for International Settlements.

The data has been collected for the years 2007 to 2012, from the Banks’ Annual Reports and the Prowess database.

Hypothesis: This study has been undertaken with the following hypothesis:

H 1: Indian Banks already have a stable and consistent CRAR

H 2: Indian Bank’s Tier I capital is always significantly higher than the level prescribed by RBI.

H 3: There is a significant difference between the CRAR in PSU Banks and Private Sector Banks

H 4: Higher CRAR has a negative impact on the profitability of - Banks H 5: Higher requirement of CRAR serves as a constraint for new branches and ATM expansion

H 6:Higher CRAR results in a lower NPA ratio.

Limitations: Analysis is done taking only ratios from the Prowess Database, not the absolute figures; as ratios have a common base, which can be compared directly. For calculating profitability the ratio taken is operating profit, as a percentage of working funds. In case of NPAs, the ratio considered is Net Non Performing Assets to Net Advances Percentage.

Data Analysis: Basel Norms focus mainly on the safety of the depositors’ money; therefore maximum emphasis is given to maintaining minimum capital, to support the risk involved in lending of depositors’ money. The minimum CRAR prescribed, by the Basel II committee, is 8%. In India, the Reserve Bank of India, the regulatory body for the Indian Banking Sector, has prescribed the same at 9%. The CRAR for all selected Banks is presented in the Table 1

Table 1 – Capital Adequacy Ratio for All Banks

A - PSU Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

SD

CV

IndusInd

Bank Ltd.

 

 

12.50

 

 

11.90

 

 

12.30

 

 

13.40

 

 

15.89

 

 

13.85

 

 

13.31

 

 

1.46

 

 

11%

State Bank of India

12.30

13.50

13.00

12.00

10.70

12.10

12.27

0.96

8%

Bank of Baroda

11.80

12.90

12.90

12.80

13.00

12.90

12.72

0.45

4%

Bank of India

11.60

12.90

13.20

12.60

11.40

11.60

12.22

0.78

6%

Punjab National Bank

 

12.30

 

13.00

 

12.60

 

13.00

 

11.80

 

11.60

 

12.38

 

0.59

 

5%

Average - PSU (A)

12.10

12.84

12.80

12.76

12.56

12.41

12.58

0.85

7 %

SD- PSU (A)

0.38

0.58

0.35

0.52

2.04

0.96

0.45

 

 

B – Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

SD

CV

Federal Bank Ltd.

13.40

22.50

20.10

17.30

15.40

13.80

17.08

3.62

21%

Axis Bank Ltd.

11.60

13.70

13.90

15.80

12.65

13.66

13.55

1.40

10%

H D F C Bank Ltd.

13.10

13.60

15.10

16.40

15.30

15.70

14.87

1.27

9%

I C I C I Bank Ltd.

11.70

14.90

15.90

19.10

17.60

16.30

15.92

2.53

16%

I D B I Bank Ltd.

13.70

11.90

11.20

10.80

12.20

12.80

12.10

1.06

9%

Kotak Mahindra Bank Ltd.

 

13.50

 

18.60

 

19.90

 

18.10

 

18.70

 

16.50

 

17.55

 

2.27

 

13%

Average - Pvt. (B)

12.83

15.87

16.02

16.25

15.31

14.79

15.18

1.26

8%

SD Pvt. (B)

0.94

3.95

3.47

2.92

2.59

1.57

2.10

 

 

Average - All Banks

12.50

14.49

14.55

14.66

14.06

13.71

14.00

0.82

6%

SD - All Banks

0.80

3.23

2.98

2.77

2.66

1.77

2.03

 

 

 

p Value (t 0.05) = 0.01274

It can be observed from the above Table that all Banks had maintained a CRAR of above 10.70 %, which is 2.70% higher than the prescribed CRAR, as per Basel II. The overall average was coming to 14.00%, which is also significantly high.

It can be also observed from Table 1 that Private Sector Banks have always maintained a higher CRAR than PSU Banks in India.

The average CRAR in PSUs is 2.58%, as against 15.18% in Private Banks, which is significantly high (P Value (t 0.05) = 0.01274, significant at 95%).

Further, it can be observed that Private Sector Banks have maintained CRAR, above 13.00%, except the IDBI Bank, whereas the PSU Banks have maintained CRAR between 12-13%, except IndusInd Bank, which has a relatively higher CRAR, than other PSU Banks.

PSU Banks have consistently maintained the same level of CRAR, whereas Private. Sector Banks have had more variations, which are reflected through the higher co-efficient of variation of the same.

In case of PSU Banks, the CV was between 4 - 8%, except the IndusInd Bank (11%), whereas in the Private. Sector Banks, it was between 9 -13%, except the Federal Bank (21%). This shows that there is higher consistency in maintaining a particular level of CRAR in PSU Banks rather than in Private. Sector Banks.

It can be seen from Table 1 that the CRAR in almost all Banks has increased, till 2010, and decreased in 2011 and 2012. This could be an impact of recession, which the world faced in 2009 and 2010.

 Table 2 – One Way ANOVA Table

 

Bank Wise p Value

Year Wise p Value

ALL

0.33994

0.00000

PSU Banks

0.83705

0.24600

Pvt. Sector Banks

 

0.31302

 

0.00117

On the basis of an ANOVA analysis of CRAR (Table 2), it can be said that there is an insignificant difference amongst all Banks and PSU Banks; whereas in case of Private Sector Banks, there is significant difference between the mean values of CRAR.

Table 3 – Growth Index of CRAR (Base Year 2007)

A - PSU Banks

 

Mar-07

 

Mar-08

 

Mar-09

 

Mar-10

 

Mar-11

 

Mar-12

 

Average

IndusInd Bank Ltd.

100.00

95.20

98.40

107.20

127.12

110.80

106.45

State Bank of India

100.00

109.76

105.69

97.56

86.99

98.37

99.73

Bank of Baroda

100.00

109.32

109.32

108.47

110.17

109.32

107.77

Bank of India

100.00

111.21

113.79

108.62

98.28

100.00

105.32

Punjab National Bank

100.00

105.69

102.44

105.69

95.93

94.31

100.68

Average - PSU Banks

100.00

106.24

105.93

105.51

103.70

102.56

103.99

B – Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

Federal Bank Ltd.

100.00

167.91

150.00

129.10

114.93

102.99

127.49

Axis Bank Ltd.

100.00

118.10

101.46

113.67

80.06

107.98

103.55

H D F C Bank Ltd.

100.00

103.82

115.27

125.19

116.79

119.85

113.49

I C I C I Bank Ltd.

100.00

127.35

135.90

163.25

150.43

139.32

136.04

I D B I Bank Ltd.

100.00

86.86

81.75

78.83

89.05

93.43

88.32

Kotak Mahindra Bank Ltd.

100.00

137.78

147.41

134.07

138.52

122.22

130.00

Average – Pvt. Sector Banks

100.00

123.64

121.96

124.02

114.96

114.30

116.48

Average -All Banks

100.00

115.61

114.56

115.48

109.76

108.88

110.71

The Growth Index of CRAR (Table 3) shows that all Banks had maintained/improved their CRAR, as compared to the CRAR in March 2007, with a few exceptions – the IDBI Bank, SBI and the IndusInd Bank.

In IDBI Bank, the CRAR decreased, as compared to March 2007, because the ratio was significantly higher in March 2007 (13.70%), as compared to the prescribed CRAR of 9% by the RBI. Hence they expanded their business without proportionately increasing the CRAR.

The difference in the growth ratio of PSU and Private Sector Banks was significant. On an average, PSU Banks registered a 2.56% growth in CRAR, from 2007 to 2012, as compared to 14.30% growth in Private Sector Banks, in the same period. The highest growth ratios were observed in ICICI Bank and Federal Bank, both Private Banks.

It can be concluded that Indian Banks have maintained a higher CRAR, in accordance with Basel II, with a consistently improving track record.

Table 4 – BASEL Application Index

(Actual CRAR to RBI's prescribed 9% CRAR)

A - PSU Banks

 

Mar-07

 

Mar-08

 

Mar-09

 

Mar-10

 

Mar-11

 

Mar-12

 

Avera ge

IndusInd Bank Ltd.

138.89

132.22

136.67

148.89

176.56

153.89

147.85

State Bank of India

136.67

150

144.44

133.33

118.89

134.44

136.3

Bank of Baroda

131.11

143.33

143.33

142.22

144.44

143.33

141.3

Bank of India

128.89

143.33

146.67

140

126.67

128.89

135.74

Punjab National Bank

136.67

144.44

140

144.44

131.11

128.89

137.59

Average - PSU Banks

134.44

142.67

142.22

141.78

139.53

137.89

139.76

B – Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Avera ge

Federal Bank Ltd.

148.89

250

223.33

192.22

171.11

153.33

189.81

Axis Bank Ltd.

128.89

152.22

154.44

175.56

140.56

151.78

150.57

H D F C Bank Ltd.

145.56

151.11

167.78

182.22

170

174.44

165.19

I C I C I Bank Ltd.

130

165.56

176.67

212.22

195.56

181.11

176.85

I D B I Bank Ltd.

152.22

132.22

124.44

120

135.56

142.22

134.44

Kotak Mahindra

Bank Ltd.

 

150

 

206.67

 

221.11

 

201.11

 

207.78

 

183.33

 

195

Average – Pvt. Sector

Banks

 

142.59

 

176.3

 

177.96

 

180.56

 

170.09

 

164.37

 

168.65

Average -All Banks

138.89

161.01

161.72

162.93

156.2

152.33

155.51

 

In India, RBI has prescribed a minimum CRAR of 9%, as against the 8% prescribed by Basel II Norms. Table 4 depicts the Basel Application Ratio, based on RBI’s 9% CRAR, for Indian Banks. It can be observed that it was 55.51% above the prescribed ratio. The index ranged between 118.89 and 250.

Table 5 – Frequency Table of BASEL Application Index (BAI)

BAI - RANGE

All Banks

PSU Banks

Private Banks

120-140

22

16

6

140-160

24

13

11

160-180

8

1

7

180-200

5

0

5

200-220

4

0

4

220-240

2

0

2

240-260

1

0

1

Total

66

30

36

The Frequency Table of BASEL Application Index (Table 5) reveals that 70% observations fall under the BAI range of 120 and160 and the remaining 30%, between 160 and 260.

Table 6 – Tier I CRAR for All Banks

A - PSU Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

SD

CV

IndusInd Bank Ltd.

7.30

6.70

7.50

8.40

12.29

11.37

8.93

2.33

26%

State Bank of India

8.00

9.10

8.50

8.50

6.90

8.50

8.25

0.75

9%

Bank of Baroda

8.70

7.60

7.80

8.20

9.00

9.60

8.48

0.76

9%

Bank of India

6.50

8.20

8.70

8.30

7.80

8.30

7.97

0.77

10%

Punjab National Bank

8.90

8.50

8.10

8.40

8.00

8.50

8.40

0.32

4%

Average - PSU (A)

7.88

8.02

8.12

8.36

8.80

9.25

8.41

0.53

6%

SD- PSU (A)

1.00

0.91

0.49

0.11

2.09

1.29

0.35

 

 

B – Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

SD

CV

Federal Bank Ltd.

8.90

19.10

17.50

15.30

13.80

12.70

14.55

3.63

25%

Axis Bank Ltd.

6.40

10.20

9.40

11.18

9.41

9.45

9.34

1.60

17%

H D F C Bank Ltd.

8.60

10.30

10.20

12.50

11.60

11.00

10.70

1.34

13%

I C I C I Bank Ltd.

7.40

11.30

12.20

13.50

11.80

11.10

11.22

2.05

18%

I D B I Bank Ltd.

9.10

7.40

6.60

6.00

7.10

7.40

7.27

1.05

14%

Kotak Mahindra Bank Ltd.

8.80

14.50

16.00

15.20

16.90

14.80

14.37

2.86

20%

Average - Pvt. (B)

8.20

12.13

11.98

12.28

11.77

11.08

11.24

1.55

14%

SD – Pvt. (B)

1.07

4.11

4.13

3.46

3.40

2.56

2.84

 

 

Average - All Banks

8.05

10.26

10.23

10.50

10.42

10.25

9.95

0.94

9%

SD - All Banks

1.00

3.66

3.57

3.19

3.15

2.20

2.51

 

 

The same trend can be observed in Table 6 - Tier I CRAR capital, for all Banks. As per prescribed Norms, it should be 6%, but it can be seen through the table that Indian Banks have always maintained a ratio above 6.9%, except the IDBI Bank (6%).

Indian Banks have maintained a strong Tier I CRAR, which shows the stable financial position of these Banks. On an average, PSU Banks have maintained comparatively lower Tier I CRAR (8.41%), as compared to 11.24% registered by the Private Sector Banks, the difference being significantly high.

Table 7 – Growth Index of Tier I CRAR (Base Year 2007)

A - PSU Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

IndusInd Bank Ltd.

100.00

91.78

102.74

115.07

168.36

155.75

122.28

State Bank of India

100.00

113.75

106.25

106.25

86.25

106.25

103.13

Bank of Baroda

100.00

87.36

89.66

94.25

103.45

110.34

97.51

Bank of India

100.00

126.15

133.85

127.69

120.00

127.69

122.56

Punjab National Bank

100.00

95.51

91.01

94.38

89.89

95.51

94.38

Average - PSU Banks

100.00

102.91

104.70

107.53

113.59

119.11

107.97

B – Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

Federal Bank Ltd.

100.00

214.61

196.63

171.91

155.06

142.70

163.48

Axis Bank Ltd.

100.00

159.38

92.16

118.94

84.17

100.43

109.18

H D F C Bank Ltd.

100.00

119.77

118.60

145.35

134.88

127.91

124.42

I C I C I Bank Ltd.

100.00

152.70

164.86

182.43

159.46

150.00

151.58

I D B I Bank Ltd.

100.00

81.32

72.53

65.93

78.02

81.32

79.85

Kotak Mahindra Bank Ltd.

100.00

164.77

181.82

172.73

192.05

168.18

163.26

Average – Pvt. Banks

100.00

148.76

137.77

142.88

133.94

128.42

131.96

Average -All Banks

100.00

127.60

122.51

126.57

124.55

124.12

120.89

 

The Growth Index of Tier 1 CRAR (Table 7) reveals that the base ratio increased, as compared to base the year 2007, except in the IDBI Bank. Though the Punjab National Bank also showed less than 100 indexes, the ratio had not decreased significantly, it decreased from 8.90 to 8.50 only.

The Kotak Mahindra Bank showed a significant increase in operating profit, in March 2008, which resulted in higher CRAR, in Tier I as well as in the overall CRAR and the trend was maintained in the consecutive years, till 2011.

The Indian Economy has witnessed a good growth, in 2008’s GDP, which resulted in an increased flow of funds from investors and an increased profitability, due to which all Banks registered good growth, in CRAR Tier I, in 2008.

Table 8 – BASEL Application Index (BAI)

 (Actual Tier I CRAR to RBI's prescribed 6% Tier I CRAR)

A - PSU Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

IndusInd Bank Ltd.

121.67

111.67

125.00

140.00

204.83

189.50

148.78

State Bank of India

133.33

151.67

141.67

141.67

115.00

141.67

137.50

Bank of Baroda

145.00

126.67

130.00

136.67

150.00

160.00

141.39

Bank of India

108.33

136.67

145.00

138.33

130.00

138.33

132.78

Punjab National Bank

148.33

141.67

135.00

140.00

133.33

141.67

140.00

Average - PSU Banks

131.33

133.67

135.33

139.33

146.63

154.23

140.09

B - Pvt. Sector Banks

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Average

Federal Bank Ltd.

148.33

318.33

291.67

255.00

230.00

211.67

242.50

Axis Bank Ltd.

106.67

170.00

156.67

186.33

156.83

157.50

155.67

H D F C Bank Ltd.

143.33

171.67

170.00

208.33

193.33

183.33

178.33

I C I C I Bank Ltd.

123.33

188.33

203.33

225.00

196.67

185.00

186.94

I D B I Bank Ltd.

151.67

123.33

110.00

100.00

118.33

123.33

121.11

Kotak Mahindra Bank Ltd.

 

146.67

 

241.67

 

266.67

 

253.33

 

281.67

 

246.67

 

239.44

Average Pvt. Banks

136.67

202.22

199.72

204.67

196.14

184.58

187.33

Average -All Banks

134.24

171.06

170.45

174.97

173.64

170.79

165.86

The BAI for Tier I (Table 8) reveals that Indian Banks have maintained significantly higher funds, in the form of equity capital, and retained earnings, so as to support their risk weighted assets. The actual ratio (9.95%) has been significantly higher than the prescribed RBI ratio (6%).

Table 9 - BASEL Application Index for Tier -1 Capital

BAI RANGE

A ll Banks

PSU Banks

Pvt. Banks

100 - 140

24

17

7

140 - 180

21

11

10

180 - 220

11

2

9

220 - 260

6

0

6

260 - 300

3

0

3

300 - 340

1

0

1

Total

66

30

36

 

The frequency table of the BASEL Application Index (Table 9) reveals that 85% observations fall under the BAI range of 100 and 220 and the remaining 15% between 220 and 340.

The BAI Ratio for all PSU Banks ranged between 100 and 180 (with 2 exceptions), whereas more than 50% of the Private Sector Banks maintained a higher BAI range (180 and 340).

In some cases, it was observed that Banks had maintained a very high CRAR, which revealed low level of risk weighted assets, as against the capital maintained by the Banks, due to a sluggish economy. It was mainly observed in Federal Bank, which had followed a relatively cautious approach, in lending money, due to the subprime crisis, followed by bank failures in USA. On the other hand, banks like IDBI had followed comparatively lenient lending rules, to expand their business, with higher calculated risk, which resulted in lower CRAR. The figures support the fact that the Indian Banking Sector followed a very conservative approach, guided and controlled by the RBI, which had protected the entire system, from a financial crisis, due to their higher capital support to the depositors.

Impact of CRAR on the Other Measures of Financial Health of Banks
To understand the impact of higher CRAR, an attempt is made to understand its relationship to other indicators of a Bank’s financial health, such as profitability, business expansion and the level of NPAs. The objective of better CRAR is to protect the depositor’s money, but at the same time higher capital requirement will lead to increased capital cost and decreased profitability. This in turn will have an impact on business expansion plans of banks.

Table 10 – Correlation Matrices of CRAR

 

 

Bank

 

CRAR & Profitability

CRAR & No.

of Branches

CRAR &

Number of ATMs

CRAR &Net NPA

to Net Advances Ratio

RValue

RValue

RValue

RValue

IndusInd Bank Ltd.

0.83675

0.65784

0.74225

-0.73658

State Bank of India

-0.31694

-0.61866

-0.70666

0.70591

Bank of Baroda

0.73548

0.49782

0.50056

-0.66912

Bank of India

0.85833

-0.47576

-0.59667

-0.62265

Punjab National Bank

-0.38443

-0.65431

-0.70006

-0.75992

Federal Bank Ltd.

0.37638

-0.40782

-0.30488

-0.76047

Axis Bank Ltd.

0.76947

0.17474

0.10888

-0.49044

H D F C Bank Ltd.

0.51902

0.82962

0.68688

-0.47082

I C I C I Bank Ltd.

0.93968

0.64465

0.48557

0.39116

I D B I Bank Ltd.

-0.02651

-0.02173

-0.23283

0.46805

Kotak Mahindra Bank Ltd.

0.30533

0.38739

0.29834

0.06557

ALL

0.57522

-0.34920

-0.15086

-0.04387

PSU Banks

0.35670

-0.33994

-0.35654

-0.43466

Pvt. Sector Banks

0.52465

0.06027

-0.04011

0.12289

Table 10 reveals the correlation matrices of CRAR with various indicators.

It can be observed that the correlation between CRAR and Profitability is not very significantly high (0.57522). The same ratio is even lower in PSU Banks (0.3567), as compared to Private Sector Banks (0.524653). The CRAR and Profitability ratio have a positive correlation, which means increase in CRAR has no negative impact on profitability.

In contrast, a higher CRAR creates a negative impact on the Branch and ATM expansion, which means that the number of branches increased at a slower rate, as compared to the rate of increase in CRAR, because of increased requirement of base capital to open new Branches / ATMs.

The correlation analysis of NPA reveals a contradictory result in PSU and Private Sector Banks. In PSUs, increased CRAR was associated with decreased NPA, whereas in the Private Sector Banks increase in CRAR was followed with an increase in the NPA ratio. This was a direct result of the quality of advances. Private Banks have relatively an higher proportion of NPA to their advances, to maintain higher profitability, whereas PSU Banks have adopted a comparatively conservative approach and have maintained a low level of the NPA to advances ratio.

Table 11 – Significance of the Correlation Coefficient

 

PE

 

CRAR &

Profitability

 

CRAR & No.

of Branches

CRAR &

Number of ATMs

CRAR &Net NPA to Net Advances Ratio

ALL

0.05555

0.07290

0.08114

0.08287

PSU Banks

0.10748

0.10892

0.10749

0.09988

Pvt. Sector Banks

0.08147

0.11201

0.11224

0.11072

Table 11 – The relationship between CRAR and the Number of Branches, Number of ATMs and NPA to Net Advances ratio was significant.

Conclusion: On the basis of the above analysis, it can be concluded that:

H1: Indian Banks already have a stable and consistent CRAR. This hypothesis is Accepted.

H2:Indian Bank’s Tier I capital is always significantly higher than the level prescribed by RBI. This hypothesis is Accepted.

H3: There is a significant difference between the CRAR in PSU Banks and Private Sector Banks. This hypothesis is Accepted.

H4: Higher CRAR has a negative impact on the profitability of the Banks. This hypothesis is Rejected.

H5: Higher requirement of CRAR serves as a constraint for new Branch and ATM expansion. This hypothesis is Accepted.

H6: Higher CRAR results in a lower NPA ratio. This hypothesis is Accepted in the case of PSU Banks, whereas it is Rejected in the case of Private Sector Banks.

The proposed Basel III Norms will definitely have an impact on the growth of Banking Sector, in India. They will create pressure on the profit margins and hence on the banks’ business expansion plans. In a country like India, where we still are far behind, in financial inclusion of majority of the rural population, we need a robust banking system, to reach the remotest of villages and increased requirement of capital, as per Basel III, will hamper the initiatives taken in this direction. It can be safely said that Indian Banks are following Basel II Norms for Capital Adequacy, more than adequately, which will help them adapt to the Basel III Norms, under capital requirement, without much difficulty. But we should remember that the increased cost on cost of funds will be transferred to the end user of funds i.e. customers. In comparison to urban customers, the rural customers are not in a position to bear this cost. This will hamper the overall growth of the Indian Banking Sector.

Bibliography

APPENDIX

Table I – Operating Profit as a % of Working Funds

Bank

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

 

IndusInd Bank Ltd.

0.90

0.90

1.50

2.30

2.70

2.70

 

State Bank of India

1.90

2.00

2.00

1.80

2.20

2.40

 

Bank of Baroda

1.90

2.00

2.20

2.00

2.20

2.20

 

Bank of India

1.90

2.30

2.70

1.90

1.80

1.80

 

Punjab National Bank

2.40

2.30

2.50

2.70

2.70

2.60

 

Federal Bank Ltd.

2.90

2.90

3.70

3.10

3.30

2.70

 

Axis Bank Ltd.

2.10

2.60

3.00

3.50

3.20

2.90

 

H D F C Bank Ltd.

3.00

3.10

2.90

3.30

3.10

3.10

 

I C I C I Bank Ltd.

2.00

2.10

2.30

2.70

2.40

2.40

 

I D B I Bank Ltd.

1.00

1.20

1.00

1.40

1.90

1.60

 

Kotak Mahindra Bank Ltd.

2.20

2.50

2.50

4.00

2.90

2.80

Table II - Net Non-performing Assets To Net Advances (%)

Bank

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

IndusInd Bank Ltd.

2.50

2.30

1.10

0.50

0.30

0.30

State Bank of India

1.60

1.80

1.80

1.70

1.60

1.80

Bank of Baroda

0.60

0.50

0.30

0.30

0.30

0.50

Bank of India

1.00

0.50

0.40

1.30

0.90

1.50

Punjab National Bank

0.80

0.60

0.20

0.50

0.80

1.50

Federal Bank Ltd.

0.40

0.20

0.30

0.50

0.60

0.50

Axis Bank Ltd.

0.70

0.40

0.40

0.40

0.30

0.30

H D F C Bank Ltd.

0.40

0.50

0.60

0.30

0.20

0.20

I C I C I Bank Ltd.

1.00

1.60

2.10

2.10

1.10

0.70

I D B I Bank Ltd.

1.10

1.30

0.90

1.00

1.10

1.60

Kotak Mahindra Bank Ltd.

2.00

1.80

2.40

1.70

0.70

0.60

 

Table III – Number of ATMs

Bank

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

IndusInd Bank Ltd.

99

183

356

497

594

692

State Bank of India

4342

5842

8581

1629

4

2008

4

2214

1

Bank of Baroda

1000

1106

1179

1315

1561

2012

Bank of India

334

440

500

820

1425

1680

Punjab National

Bank

1009

1516

2150

3500

5050

6009

Federal Bank Ltd.

391

532

617

732

805

1005

Axis Bank Ltd.

2341

2764

3595

4293

6270

9924

H D F C Bank Ltd.

1605

1977

3295

4232

5471

8913

I C I C I Bank Ltd.

3271

3881

4713

5219

6104

9006

I D B I Bank Ltd.

520

755

900

1201

1351

 

1542

Kotak Mahindra Bank Ltd.

 

135

 

313

 

387

 

492

 

710

 

848

 Table IV – Number of Branches

Bank

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

IndusInd Bank Ltd.

170

180

180

210

300

400

State Bank of India

9314

10270

11540

12638

13698

14270

Bank of Baroda

2772

2899

2974

3148

3418

3959

Bank of India

2747

2905

3021

3207

3519

4029

Punjab National Bank

4119

4264

4427

4951

5194

5675

Federal Bank Ltd.

536

603

612

672

743

950

Axis Bank Ltd.

508

651

835

983

1390

1622

H D F C Bank Ltd.

684

761

1412

1725

1986

2544

I C I C I Bank Ltd.

755

1262

1419

1707

2529

2752

I D B I Bank Ltd.

432

499

509

708

816

973

Kotak Mahindra Bank Ltd.

105

178

217

249

321

355

 

Authored by

Prof. Nirmala Joshi

nirmalaj_iom@met.edu

 

Ms. Disha Shah

dishajs@gmail.com

Tags: MET Institute of Management