Sustainability and Bank Capital, A Study of Indian Private Banks

Abstract

Banks’ lending business being risk based must be supported by adequate quantum of capital to ensure sustainability, soundness and resilience of the bank. The Basel Committee on Banking Supervision announced in 1988, a set of capital norms for banks to observe in order to reinforce their financial stability and soundness when struck by potential losses from deterioration of asset quality. This was known as Basel I. For the purpose of capital adequacy, capital has been sub divided into Common Equity Tier 1, Additional Tier1 and Tier 2 capital. Capital Adequacy, on this basis, has also been classified based on component of capital. The study reveals that all the new private sector banks are deeply conscious of the sustainability of their capital from the stand point of their operations and risk profile of assets. As a good strategy, they have been gradually building on their capital funds in consonance with their business growth. A sensitivity analysis of capital sustainability shows that even 10% escalation in risk weighted assets will not impair the capital adequacy significantly as the ratio will continue to be well above the benchmark ratio of 9 %. The role of Indian bank regulator is laudable in this regard as it has been studiously inspecting capital ratios of banks both by on site and off site appraisal of banks.