The current global economic crisis
has had a significant impact on
the economies and financial systems of several countries. Banks
across the world are facing issues with respect to liquidity, capital, and credit.
While scheduled commercial banks in India (Indian banks) are witnessing the
consequences of a full-blown global crisis, they seem to have emerged largely
unscathed. A large part of the credit for the stability of Indian banks goes to
the Reserve Bank of India (RBI) for maintaining the right kind of regulatory
environment. The other key reason for the steady performance of Indian banks
is their capitalization. Indian banks have witnessed record credit growth in
the last decade but have not compromised on their capitalization levels. The
banking system today boasts of a healthy Capital Adequacy Ratio (CAR) of
more than 13%, a large part of which is constituted by core (Tier I) capital.
While the heightened asset-side risk will affect capital ratios, Indian banks will
remain adequately capitalized to manage growth plans and asset
quality-related risks.
India's banks have maintained healthy capitalization levels in
the past decade. Their CAR has varied between 11% and 13% from 1997-98
(refers to financial year, April 1 to March 31) to 2008-09; this is well above
the minimum requirement of 9% stipulated by the RBI. This assumes
even more significance because Indian banks registered strong credit
growth in this period. The total advances of Indian banks increased to Rs 27.7 tn
as on March 31, 2009 from around Rs 3.2 tn as on March 31, 1998. In
addition, all bank groups have maintained healthy capitalization
levels.
To allow banks to raise capital, the RBI has provided several options. In
January 2006, the RBI allowed banks to issue innovative capital instruments
for inclusion under Tier I capital, and hybrid debt capital instruments for
inclusion under Tier II. Tier III capital was not considered owing to the
short-term nature of such capital. In October
2007, the RBI allowed Indian banks to also issue preference shares as capital.
Under the new guidelines, Perpetual Non-Convertible Preference
Shares (PNCPS) will be treated at par with equity. All other types of
preference shares will, however, be treated as
debt. Raising capital through hybrid instruments or preference shares offers
banks an alternative to issuing equity to enhance their capital base. |
