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 -
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 :
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
Ms. Disha Shah
©Mumbai Educational Trust, All rights reserved | Last Modified Date: Thursday, November 21st, 2024