This paper applies multi-criteria decision making algorithms to arrive at the financial health of commercial banks in India, both in the public sector and the private sector. The various performance parameters considered arise out of the Basel guidelines, and we feel that our study will facilitate the regulator in monitoring the performance of banks over time. We also investigate whether the stock market has taken cognizance of these regulatory variables and valued banks accordingly. Our results indicate that while relative performance of private sector banks has not undergone much change, some public sector banks have improved over time. The results also reveal that the stock market does not attach much importance to these regulatory variables in the valuation of banks.

The Basel guidelines (Basel I, II and III) have subjected commercial banks to prudential norms of income recognition, asset classification, provisioning and capital adequacy. The concept of economic capital has been introduced as different from regulatory capital. The classification of risk into credit risk, market risk and operational risk has brought clarity to the nature of risks faced by banks and has accordingly led to various approaches for calculating capital requirements. Given the nature of activities banks are expected to perform, they are exposed to risk. The guidelines lay out the importance of capital and support it with two other pillars, namely, supervisory review and market discipline. As banks deal with savings of the depositors, a significant part being small depositors, it is important that their activities be periodically reviewed by the regulator. Further, as they need to raise capital from the market, it is necessary that they disclose their financial health to the fullest extent for shareholder confidence.

After the 2008 financial crisis, these norms have got tighter and commercial banks have been advised accordingly. The Basel III guidelines (December 2010, revised June 2011) build on the previous framework by further refining capital requirements. It states that “…this document,