Abstract
Did banking sector reforms in India and the adoption of capital adequacy norms based on the Basel Capital Accord prompt Indian banks to understate their bad loans? This paper addresses this question by investigating whether Indian banks under provide for loan loss provisions and understate their gross non performing assets in order to boost earnings and capital adequacy ratios. The paper examines the behavior of Indian banks in the context of tighter regulatory standards that became effective after 1999. The results show that "weak" Indian banks – defined by low profitability and low capital ratios camouflaged the magnitude of their gross non performing assets in the post-1999 period. Based on this the paper concludes that the true nature of India's bad loan problem may be more serious than alluded to in recent studies.
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