Capital adequacy stipulations at the global level have become more demanding following the Basel Committee's initiative to introduce internal c. This article considers the three alternative paradigms Value at Risk (VaR), Expected Shortfall (ES) and Expected Excess Loss (EEL) that may be used to determine the regulatory capital. The study also articulates the methodology for dealing with the granularity problem. Furthermore, it outlines the Indian banking sector scenario in respect of capital adequacy for the period 1996-97 to 2002-03. Results of panel regression show that Tier I CRAR of Indian commercial banks is positively related to operating efficiency and has a negative relationship with NPA ratio. But no definite relationship between the CRAR and bank size could be determined from the analysis.
Commercial banks as financial intermediaries, play an important role in channelizing
financial resources from the savings community to the investing community. In so doing,
they act as depositories/trusts which are ultimately responsible for the safety of the
investments. This is because the deposit contracts entered into by the commercial banks do
not have a pass through structure. Protection of investments from credit and market risks
is an issue of fundamental importance not only for the banks but also for the market
regulators. Since commercial banks deal with public money, large losses arising out of
lending/investment activities of comercial banks lead to confidence crisis in the
economy; especially with respect to the financial intermediaries. The slowdown in resource
mobilization causes decelerations in investment and growth. Financial market regulators
therefore, make use of capital coverage regulations as one of the safeguards against possible
large losses arising in the financial system. Capital adequacy requirements impose at least
a minimum capital participation by bank owners, usually expressed as a fraction of certain
assets of the bank.
This article explores the capital adequacy scenario of Indian commercial banks in the
context of evolving capital adequacy regulations. The paper is divided into four sections.
Section I is concerned with the BIS capital adequacy regulations. Section II gives a
profile of Indian commercial bank capital adequacy for the period 1996-97 to 2002-03. |
