The recent financial sector crisis and the failure of banking system even in the developed countries like US have forced the policy makers and researchers to look into the details of such failures. Capital adequacy is an indicator of the financial health of the banking sector. It is measured by the Capital to Risk Weighted Asset Ratio (CRAR), defined as the ratio of a bank's capital to its total risk-weighted assets. Financial regulations generally impose a capital adequacy norm on their banking and financial system in order to provide a buffer to absorb unforeseen losses due to risky investments. The CRAR is the most widely employed measure for the soundness of a bank. Globally, the CRAR ranges between 7.1% and 34.9%. The overall CRAR of the Indian scheduled commercial banks at the end of March, 2007 was 12.3%, as against the Indian regulatory requirement of 9%, which itself was higher than the Basel norm of 8%. This study presents the status of Capital Adequacy Ratio (CAR) of different categories of banks and also ascertains the impact of application of Basel II norms on CAR of selected banks.

The recent financial crisis and the failure of banking system even in the developed countries like the US have forced the policy makers and researchers to look into the details of these failures. Capital adequacy is an indicator of the financial health of the banking system. Capital standards across the world are converging at the behest of the Basel Committee on Banking Supervision. In July 1988, the Basel Committee on Banking Supervision approved the adoption of a risk-based capital standards for banks in member countries. Prior to the introduction of these risk-based capital standards, banks in the G-10 were subject to leverage requirements which mandated banks to hold a flat percentage of their assets as capital, irrespective of the level of risk in their portfolio. Beginning on December 31, 1990, the risk-based capital standards supplemented the existing leverage requirements. Although the risk-based capital standards were designed to make the capital standards similar across all countries according to the Basel Committee, their primary purpose was to prepare banks to hold capital in accordance with the perceived risk in their portfolio. To accomplish this, the risk-based capital standards were explicitly linked to capital risk by assigning risk weights to broad categories of on and off balance sheet assets. As a final step, banks were required to hold capital equal to a certain percentage of the total risk-weighted assets. The Risk-Based Capital (RBC) standards consists of two parts: Tier-I capital and Tier-II capital.

Capital adequacy has traditionally been regarded as a sign of strength of the financial system in India. In terms of section 17 of the Banking Regulation Act, 1949, every banking company incorporated in India is required to create a reserve fund and transfer a sum equivalent to not less than 20% of its disclosed profit to the reserve fund every year. The RBI has advised banks to transfer 25%, and if possible 30%, to the reserve fund. Consequent upon the recommendations of the Narasimham Committee on financial sector reforms, a capital to risk-weighted assets system was introduced for banks in India in April 1992, largely in conformity with international standards, under which banks were required to achieve 8% Capital to Risk Weighted Asset Ratio (CRAR). Indian banks with branches abroad were given time till March 31, 1994 (subsequently extended to March 31, 1995) to achieve the norms of 8% CRAR ; the capital was to comprise Tier-I plus Tier-II capital, of which Tier-II should not exceed 100% of Tier-I.

Bank Management Journal, Basel II Norms, Financial Sector Crisis, Banking Sectors, Commercial Banks, Financial Sector Reforms, Capital Adequacy, Banking Supervision, Capital Banks, Minimum Capital Requirements, Credit Market, Credit Rating Agencies, Market Risk, Operational Risk, Financial Statements, Financial Reporting System.