Research Paper
Commerce
E-ISSN No : 2454-9916 | Volume : 8 | Issue : 6 | Jun 2022
ANALYSIS OF CAPITAL TO RISK ASSETS RATIO (CRAR) AND BASEL NORMS Dr. Deepali Jain Associate Professor, Dr Bhim Rao Ambedkar College, University of Delhi, Delhi. India. ABSTRACT This paper revisits the implementation of Basel I, II, and III by the RBI in the Indian banks. The global financial crisis in 2007, the Basel Committee on Banking Supervision (BCBS) proposed specific reforms to strengthen global capital and liquidity regulations to promote a more resilient banking sectori. India introduced Basel III norms in March 2019. The Basel III reforms have been proposed to be implemented from 1 January 2023 and will be spread over five years. The paper has three sections. Section I emphasizes the need for and determination of Capital Adequacy Ratio (CAR) with an example of 3 banks having a different capital base, deposits, loan/ advances, income, and expenses. Section II includes a comparison of Basel I, II, and III. Conclusions and suggestions are presented in Section III. KEYWORDS: Capital Adequacy Ratio, Risk, Basel, Banks. SECTION I 1.1 INTRODUCTION: Basel is an international financial institution owned by Central Bank. It provides international monetary and financial cooperation Basel was established in 1930 by an inter-governmental agreement between Germany, Belgium, France, the UK, Italy, Japan, the USA, and Switzerland. In February 1995, one person single-handedly bankrupted the bank founded in 1762; bearing bank was Britain's oldest merchant bank and Queen Elizabeth's bank. In 1996, BCBS introduced Market risk Basel I. In India, the first Narasimhan Committee Report recommended the introduction of capital to the risk-weighted assets system for banks in April 1992. In 1999 India adopted the Basel I guidelines and Basel II 1.2 OBJECTIVE OF STUDY: 1. To study need for and determination of Capital Adequacy Ratio (CAR) with an example of 3 banks having a different capital base, deposits, loan/ advances, income, and expenses. 2.
To analyze and compare the provisions of Basel I, II, and III.
1.3 RESEARCH METHODOLOGY: Secondary data are used to study the need for and determination of Capital Adequacy Ratio (CAR) with an example of 3 banks having a different capital base, deposits, loan/ advances, income, and expenses.
loans, and some are very high risk, like education loans and vehicle loans. It depends on the risk that different weightage is given low risk, medium risk, and high risk. Banks are required to maintain a minimum Capital Adequacy Ratio (CRAR) of 9 percent on an ongoing basis. They are required to disclose the following information in the Notes to Accounts in this regard: 1.
Total Capital Adequacy Ratio
2.
Capital Adequacy Ratio-Tier I Capital.
3.
Capital Adequacy Ratio-Tier II Capital.
4.
Amount of subordinated debt raised as Tier II Capital.
Capital adequacy requirements safeguard the banks against the possibility of their failure and protect investors. It also strengthens market discipline. Need and Determination of Capital Asset Ratio (CAR): Banks were also advised to formulate and operationalize the Capital Adequacy Assessment Process (CAAP) required under Pillar II of Basel II. To ensure adequate capital with the banks measured by the capital adequacy ratio or capital. The focus of the norm was to ensure adequate capital, which is measured by capital adequacy or capital to risk-weighted asset ratio. Ratio or CAR or to ensure adequate capital with the banks is the object of the focus of these norms.
1.4 CAPITAL FUNDS OF BANKS: Capital funds of banks are divided into two segments, i.e., Tier I capital and Tier II capital.ii The composition of these capital funds is as follows :
The bank's capital is invested money by owners or owner's equity or common equity. In India, CAR should be greater than or equal to 9%.
Composition of Tier I Capital:iii
But as per Basel norms, it is 8%, but RBI is 9% for more security and safety.
Elements of Tier I Capital
Elements of Tier II Capital
1. Paid-up capital [ordinary shares], 1. Undisclosed Reserves and other disstatutory reserves closed free reserves. 2. Perpetual Non-Cumulative Pref- 2. Revaluation Reserves erence Shares [PNCPS] 3. Innovative Perpetual Debt Instru- 3. General Provisions and Los Reserves. ments [IPDI] 4. Capital Reserves representing sur- 4. Hybrid Debt Capital Instruments plus arising out of sale proceeds of assets. 5. Subordinated Debt 6. Investment Reserve Account 1.5 CAPITAL ADEQUACY RATIOiv: Capital to Risk Assets Ratio (CRAR), popularly called the Capital Adequacy ratio, is determined by dividing Total Capital by Total Risk-Weighted Assets. In the formula form: 1
Capital Adequacy Ratio = Total Capital / Total Risk-Weighted Assets*
2 Risk-weighted asset means the book value of an asset multiplied by the percentage of its weight allotted by the RBI. Risk-weighted assets are the assets of bank loans. Loans have specific risks. Some of the loans are low risk, like housing
let us take an example: Assume Bank A has Rs 5 crore in tier 1 capital and R 3 crore in tier 2 capital. Banks invest all this amount and earn a considerable amount of interest. Bank A loaned Rs 5 crore to ABC Corporation, which has 25% riskiness, and Rs70 crore to XYZ Corporation, which has 55% riskiness.Bank A has risk-weighted assets of Rs 39.75 crore (Rs5crore * 0.25 + Rs70 crore * 0.55). It also has a capital of Rs. 8 crores (Rs 5 crore + Rs3 crore). Its resulting total capital adequacy ratio is 20.12% (Rs8 crore /Rs 39.75crore* 100), and its Tier 1 ratio is 12.57% (Rs5 crore/Rs39.75 crore * 100). Similarly, the Bank B and Bank C calculate CAR and analyze that is necessary to maintain adequate capital to save the amount of depositor. Case1: Bank have good times:Particulars(let)
(Bank A)
(Bank B)
(Bank C)
Tier1 capital
Rs. 5 crore
Rs. 2.3 crore
Rs. 2.05 crore
Tier II capital
Rs. 3 crore
Rs 0.7crore
Rs. 0.70 crore
Total Capital
Rs. 8 crore
Rs. 3 crore
Rs. 3 crore
Deposit SLR and CRR (Let25%)
100 crore 25 crore
75 crore 20 (approx.)
50 crore 15 (approx.)
Amount available to loan
75 crore
55 crore
35 crore
Income from Loan(14%average)(A)
Rs. 10.50
Rs 7.70
Rs 4.90
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