Module: 5 - Capital Adequacy of Selected Indian Banks

The Capital adequacy maintained by the banks selected for special study during the last five years as obtained from the website of RBI are given in the table below:

Adoption of CAR Norms by Indian Banks

Before the onset of banking sector reforms the problem of capital adequacy was not felt as a concern by the Indian Banking System. For one it was a captive sector cut off from international effects with directed system of management. Secondly the opaque structure of accounting standards followed, the financial statements published were not reflecting the real weaknesses of the banking units. Prudential norms of asset classification, income recognition and provisioning were not followed. While the assets were continuously depreciating it was recognised, interest income on accrued basis was accounted and transferred to revenue. There was no competition amongst the nationalized banks in the real sense. Many private banks came to adversity, but these were quickly merged with bigger nationalized banks.

Capital Adequacy norms based on Basel 1988 accord were prescribed by RBI for adherence by the Indian Banks in 1993. All Indian banks have been following the stipulation since then. But banks do not publish the calculations based on which their respective capital adequacy is calculated. They submit returns to RBI detailing the calculations, based on which published the bank wise capital adequacy particulars in its website. The CAR ratios are thus available on RBI website in respect of all banks commencing from the year 1998-99 up to the year 2002-03.

RBI website published the respective balance sheets of all Indian banks. However the latest balance sheet for the year 2002-03 is not yet put up therein. It is therefore possible to know the Tier I, of each bank and its total Assets. Tier II Capital calculated as per weightage of maturity of subordinate debts (Bonds) is not published. Neither can it be gathered from the published balance sheet. So is the case with regards to RWA. The information on RWA (Risk Weighted Assets) as calculated by the banks and conveyed to RBI is not available for public information. RBI has furnished on its website CAR separately for Tier I and Tier II capital for the banks for the years 2000-01 and 2001-02. Calculating Tier I capital we can arrive at the Tier II capital from these figures.

We propose to consider the cases of one leading Foreign Bank (with reference to its Indian Business) i.e. Citibank, the first and second biggest amongst domestic banks i.e. SBI and ICICI, (also these represent the biggest amongst public sector banks and private sector banks respectively) and also that of Punjab National Bank, the biggest amongst the Nationalized Banks and one of the oldest banks in India. As the figures of last financial year ended 31st March 2003, are not available, we will study only the figures relating to the earlier two years i.e. 2000-01, and 2001-02 in terms of balance sheet figures. There is a record in respect of all these banks of having achieved CAR of over 10% throughout. In respect of ICICI the CAR is stable at 11%plus. But in the year 1999-2000 it shoot up to 19.64% on account of then merger of ICICI (Development Financial Institution) with ICICI Bank in that year. The CAR of all the other three banks is not only maintained over 10% throughout, but also exhibits a general tendency to improve. Of the four banks SBI is having the highest Ratio at 13.50% as at 31.03.2003 followed by PNB at 12.02%. In respect of ICICI the CAR in the years has come down to 11.10% in 2002-03 from the previous years’ record of 11.44 (2001-02) and 11.57 (2000-01).

As a whole Indian Banking System is adequately capitalized much above international norm of 8%, our domestic standard being 10%. All Public Sectors Banks except one single case of Dena Bank (9.33%) fulfill CAR Norms as at 31.03.2003. All foreign banks established in India satisfy CAR norms without exception.

In respect of Private Sector Banks these are classified as Old Private Banks And New Private Banks. The new private Banks represent the banks that have been licensed by RBI after 1993 in terms of the liberalized policy pursuant banking sector reforms. Two old Private banks and three new private banks do not conform to CAR norms as at 3`1.03.2003 as detailed below

1. Catholic Syrian Bank Ltd. (9.66%)

2. ING Vysya Bank Ltd. (9.81%)

3. Centurion Bank Ltd. (1.95%)

4. Global Trust Bank Ltd. (0% Negative capital)

5. IDBI Bank Ltd. (9.56%)

Of the five banks three are much above international standard of 8% and marginally below RBI prescription of 10%. The two new private banks Centurion Bank And Global Trust Banks did face severe problems in the past years leading to the erosion of their capital. The respective banks are trying their best to recoup the situation.

Though the public sector banks as a whole now exhibit a robust picture, it should be remembered, most of them were earlier in desperate condition in the early Nineties. The Government of India came to their support with very hefty rehabilitation package (over Rs.25000 Crore). In addition to the infusion of this huge additional capital, many of the banks under this category have also raised share capital from the IPO market, in addition to seeking support liberally for public subscriptions under Tier II capita.