The present paper compares the capital adequacy of Indian commercial banks from a different angle: the Core Capital in relation to their Risk Weighted Assets by constructing a capital adequacy frontier and computing capital adequacy efficiency of the in-sample commercial banks by using Bilateral Model of Comparison. The sample has been categorized into two groups as Public Sector Banks and Non-Public Sector Banks (comprising Private Sector and Foreign Banks). The distribution of the efficiency scores for the two groups has been found to be significantly different, and the results revealed that the Non-PSU Banks consistently outperformed their PSU counterparts in terms of capital adequacy. In the second phase, the study has attempted to quantify the performance of the banks and identified four important performance indicators through Principal Component Analysis and tried to see through Spearman’s rank correlation test and a left censored Tobit Model how capital adequacy is linked to these four principal components

With a view to enabling banks and depository institutions across the world to effectively measure and manage risks and handle their capital, the Basel Committee on Banking Supervision has issued a broad framework and supervisory guidelines over the years since its formation in 1974 and encouraged its implementation by the member nations. The Committee makes banking policy guidelines for both member and non-member countries and helps authorities to implement its suggestions.

The first Basel Accord, known as Basel I, was issued in 1988 and it focuses on the capital adequacy of financial institutions. Along with the definition of regulatory capital, a basic formula for capital divided by assets was constructed and a ratio of 8% was chosen as minimum capital adequacy. Before 1988, many central banks allowed different definitions of capital in order to make their country’s bank appear well capitalized than they actually were. As a result the definition of capital began to diverge more and more. The Basel Accord standardized the definitions and categorization of assets and capital so that they can be risk weighted. Basel II, drafted in 2004, is the second of the Basel Committee on Bank Supervision’s recommendations, and unlike the first accord, Basel I, where focus was mainly on credit risk, the purpose of Basel II has been to create standards and regulations on how much capital financial institutions must set aside to mitigate the market and operational risks, in addition to credit risk.

Applied Finance Journal, Capital Adequacy Frontier, Indian Commercial Banks, Capital Adequacy, Capital to Risk weighted Assets Ratio (CRAR), PSU, non-PSU.