Improvement in CAR demonstrates the soundness and resilience of Indian banking sector

As per findings of ASSOCHAM Financial Pulse (AFP) Study namely “Indian Banking Sector: Capital Adequacy under Basel II”, Average Capital adequacy Ratio (CAR) of 10 commercial banks in India improved from 12.35 per cent in 2007-08 to 13.48 per cent in FY 08-09.

As a result, the Indian banking sector weathered the storm rising out of the global financial crises aptly during FY 2008-09. The capital adequacy ratio (CAR) of the ten banks that announced their financial results for year ended March 2009 as per both Basel I and Basel II norms shown significant improvement during testing times.

In addition to the credit risk of the banking sector (as defined by the Basel I), the Basel II accord covers a wider spectrum of risks such as operating and market risk. Despite stringent and even rigorous capital adequacy norms, the remarkable performance of Indian banks during the crisis period has defied the withering collapse in the financial sector.

The increase in CAR of banks such as State Bank of Bikaner and Jaipur, State Bank of Mysore, Indian Overseas Bank, Bank of Baroda, Indian Bank, Bank of India, UCO Bank, Syndicate Bank, Punjab National Bank and State Bank of Travancore also shows that these institutions adopted prudent lending practices and thus showed their strong fundamentals.

The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9 per cent, one percentage point above the Basel II requirement.



The AFP Study stated, after the collapse of Lehman brothers in September 2008, crumbling banking institutions in US, UK and other European countries during 2008-09 sought government support by way of massive capital injections to avert severe implications of toxic financial assets worth USD 4 trillion.

US alone accounted for as many as 60 banks failures during 2008-09, costing the FDIC Deposit Insurance Fund a whopping USD 25 billion.

Failure of number of banks in countries like US, UK, Iceland, Ukraine, Belgium, Ireland, Latvia, Russia and Spain had severe impact on their economy. However, the Indian banking sector not only resisted such a scenario but improved significantly.

After pumping in hundreds of billions of dollars to stabilize the domestic banking and financial institutions, the outcome of the stress test of US banking sector highlighted the shortfall of another 75 billion in banks to have adequate capital level.

As per the ASSOCHAM Study, to avoid any complacency in the banking sector regulations, Indian authorities sought USD 3 billion from the World Bank to infuse funds into public sector banks to shore up their capital against various risks to ensure credit flow to productive sectors to beat the economic slowdown.

The government injected capital into the public sector banks that had their capital adequacy ratio (CAR) below 12 per cent. Four PSU banks including Union Bank of India, Uco bank, Central Bank of India and Vijaya Bank received fresh doses of capital from the government.

(Source: Assocham press release dated June 09, 2009)

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