?Indian banks robust': BL
Banks accounting as they do for 60 per cent of the country's financial assets are systemically
important.Indian banks are ?financially robust', declares the ?India's Financial Sector: An Assessment' report
released by the committee on financial sector assessment (CFSA) nine months ago.In the light of the global
financial crisis, many countries, including the US, were testing their financial systems for vulnerabilities.
The Reserve Bank of India, in association with Government of India, set up a CFSA which released the
foresaid report. While the data used for assessment are almost one and a half year old, the results are
relevant even today as the environment got worse, with banks sitting on higher proportion of non-performing
assets and restructured assets.
Capital adequacy
Take a look at what the report says on two main indicators: Capital adequacy and the asset quality of
banks.Providing a cross-country comparison, the report reveals that the Indian banks had capital adequacy
ratio and capital-to-asset ratio lower than those of their emerging market peers in Brazil, Mexico and South
Korea as of March 2007.However, the capital adequacy ratio of the banks is much above the 8 per cent
mandated by the Basle Committee and 9 per cent by the RBI. As of March, 2009, the capital adequacy ratio
of Indian banks stood at 13.98 per cent, thanks to the high capital adequacy ratio maintained by private and
foreign banks. Although government-owned banks have relatively lower ratios, they are still quite
comfortable.That said, nationalised banks would require recapitalisation from time to time to maintain this
ratio. The report states that thegovernment may need to pump in Rs 49,552 crore by 2012-13 for the
nationalised banks to grow their loans (risk weighted assets) at 30 per cent per annum. Asset quality
The Report says that Indian banks' capital adequacy ratio may fall by 140 basis points for 100 per cent
increase in the NPAs.
The Report acknowledges, that historically, Indian banks managed to clean up their balance sheets, thanks
to high treasury income during the falling interest rate regime, legal reforms such as SARFESI Act (2000)
enabling them to reduce the NPAs and the economy doing well in 2004-08.
It must be noted that when the report was written, the NPAs of banks had bottomed out. Since then they
have been trending up - Net NPAs have since risen by 32 per cent in 18 months ended September 30,
2009. High proportion of restructured loans is an added concern.