Capital ratio for Indian banks

Indian banks are most at risk in South and South-East (S-E) Asia, and being under-capitalised, they lack sufficient loan provisioning, says a Moody's poll. It pointed out the limited ability of these lenders to access equity markets for the much-needed capital.

Earlier this week, Moody's had revised the outlook on several Indian banks to stable or negative from positive, signaling a lowering in potential government support, and/or weaknesses in solvency metrics.

It is imperative for banks to meet the Basel-III regulatory norms by March 2019. Indian banks need to maintain a minimum common equity ratio of 8% and total capital ratio of 11.5% by 2019. As of March 2017, state-run banks maintain an average common equity ratio of 8.5%.

Reserve Bank of India’s June Financial Stability Report expressed concern that gross bad loan ratio of banks would rise to 10.2% of the total loan book in March 2018 from 9.6% in March 2017. The ratio may even jump to 11.2%.

The capital adequacy ratio (CAR) is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world.

When a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity.

If a company can't generate capital over time, it increases its chance of going bankrupt as it loses the ability to service its debts. Undercapitalized companies also tend to choose high-cost sources of capital, such as short-term credit, over lower-cost forms such as equity or long-term debt, thus writes www.investopedia.com.

In the banking industry, undercapitalization refers to having insufficient capital to cover foreseeable risks. Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.).

The Reserve Bank will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the capital held by a bank is commensurate with the bank’s overall risk profile.