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Account and Financial Management Journal ISSN: 2456-3374

Impact Factor: 4.614

Capital Adequacy Ratio as Performance Indicator of Banking

Sector in India-An Analytical Study of Selected Banks
Rakesh Kumar1, Dr. Bimal Anjum2
1
Research Scholar, Inder Kumar Gujral Punjab Technical University, Kapurthala (Punjab)
2
D.A.V. College, Sector-10, Chandigarh.

ARTICLE INFO ABSTRACT

The capital adequacy ratio (CAR) is a measure of a bank's capital. As per the
requirements of Basel committee on banking supervision, every bank must
maintain a desirable level of Capital Adequacy Ratio. It is expressed as a
percentage of a bank's risk weighted credit exposures. It is 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
corresponding Author: world. It is the ratio of a bank's capital to its risk. The ratio ensures that the
Rakesh Kumar how much extent a bank can cover its losses in future. The present paper
Research Scholar, Inder analyse the banking sector performance in the light of capital adequacy ratio.
Kumar Gujral Punjab For the purpose of analytical study, five banks from each sector (Public,
Technical University, Private & Foreign) are selected. The analysis is done in the three Basel
Kapurthala (Punjab). regime periods.
KEYWORDS: - Capital Adequacy Ratio, Public, Private, Foreign Sector, Performance

Introduction The solvency of banks is not a matter that can be

Due to increase in the non-performing left alone to the banking industry. This is because
assets worldwide, banks in the present scenario banks have the savings of the entire economy in
face an inherent risk of insolvency. Since the their accounts. Hence, if the banking system were
banks are high degree leveraged, there could be a to go bankrupt, the entire economy would collapse
run on the bank any moment if their reserves are within no time. Regulatory bodies are involved in
considered to be inadequate by the market. So the creation and enforcement of capital ratios. It
every bank must maintain adequate capital if they is also influenced by international banking
want to survive. This capital is generally institutions. The reserve requirements are
measured in the form of a “capital adequacy ratio” supposed to limit the amount of money that can be
and central banking institutions all over the world created by banking institutions. However, in some
prescribe the level of capital that needs to be countries, like the United Kingdom and Canada,
maintained. Capital adequacy ratio is defines the there is no reserve requirement at all. However,
extent of percentage of bank’s capital set aside to here too banks cannot go on creating unlimited
meet future contingencies. money. This is because the capital adequacy ratio

798 Volume 2 Issue 6 June 2017

DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
also impacts the amount of credit that can be In this paper, the CAR analysed in the
created by the banks. light of different Basel norms implementation
Capital adequacy ratios indicates that a period.
certain amount of the deposits be kept aside
whenever a loan is being made. These deposits are Review of literature
kept aside as provisions to cover up the losses in Basically, the literature survey is considered as an
case the loan goes bad. These provisions therefore important pre-requisite to actual planning and
limit the amount of deposits that can be loaned out execution of any research project. Here, are some
and hence limit creation of credit. The capital of the literature reviews given below:
adequacy ratios are laid based on the credit Gupta and Meera (2011) feel that Basel II
exposure that a particular bank has. Credit regulations have led to a significant improvement
exposure is different from the amount loaned out. in the risk structure of banks because their capital
This is because banks can have credit exposure if adequacy has improved. Also, there exists an
they hold derivative products, even though they inverse relation between CAR and Non-
have not actually loaned out any money to Performing Assets (NPAs), which clearly
anybody. Therefore, the concept of credit indicates that due to capital regulation, banks have
exposure and how to measure it in a standardized to increase their CAR which leads to decrease in
way across various banks in different regions of NPAs.
the world is an important issue in formulating
capital adequacy ratios. There are two major types Hasan (2012), in his research paper titled ‘The
of credit exposures that banks have to deal with Extent of Bank’s Commitments in Basel
Balance Sheet Exposure and Off Balance Sheet Committee Regulations- the General Frame of the
Exposure. study’ reveals the impact of Basel norms of 10
selected Jordan Banks. The paper concludes upon
Basel Norms & CAR that Jordanian Commercial banks do not face
Basel I norms framed in 1988 and it challenges in applying the Basel 2 principles in
recommended that a bank’s capital to risk relation to capital adequacy, supervising control
weighted asset ratio (CRAR) should be at least 8 and full disclosure.
per cent. Under the initial Basel I norms, assets Jain Mukul (2013) in his paper titled ‘ A Critical
were risk-weighted according to their credit risk. Review of Basel III Norms in Indian PU Banks’
Basel II norms which is implemented in 2005 is a concludes that with the implementation of Basel
more comprehensive framework, including the III Norms in Indian Banks, Banks should have
CRAR computation, and provisions for required at least Rs.5,000 Billion in extra capital
supervisory review and market discipline. . Basel result in decrease in the profitability of banks in
III was supposed to strengthen bank’s capital India. The government could consider reducing its
requirements by increasing bank liquidity and majority stakes in a variety of state-owned banks,
decreasing bank leverage. It is implemented in as it attempts to cut the Rs. 900 billion in
2013 to 2015 but whole implementation is done recapitalization, needed to maintain present
upto 2019.It is a comprehensive set of reform shareholding levels.
measures designed to improve the regulation,
supervision and risk management within the Objective of the study
banking sector. The basic objective of the study is to highlight the
Capital Adequacy Ratio of different sector banks
799 Volume 2 Issue 6 June 2017
DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
in India and to judge the solvency position of 2005 Basel-I, After 2005 Basel-II and After 2013
banks. Basel-III.

Sample of study Data Collection

The study consists of five banks from each sector Data are collected from RBI website and annual
(Public, Private & Foreign). accounts of bank. So study is basically in
secondary in nature. Various parametric and non-
Period of Study parametric statistical tools are used to analyse the
The study comprises the period from 2001-02 to significance of CAR in the bank’s performance in
2014-15. In this period, CAR are analysed and the three different Basel periods.
compared in the three Basel norms i.e. before

Findings & Interpretation

Table 1: Capital Adequacy Ratio of Banks Selected for Study (in %)
Year/Bank 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-02 -03 -04 -05 -06 -07 -08 -09 -10 -11 -12 -13 -14 -15
SBI 13.35 13.50 13.53 12.45 11.88 12.34 13.54 14.25 13.39 11.98 13.86 12.92 12.44 12.00
PNB 10.70 12.02 13.10 14.78 11.95 12.29 13.46 14.03 14.16 12.42 12.63 12.72 11.52 12.21
BOB 11.32 12.65 13.91 12.61 13.65 11.80 12.94 14.05 14.36 14.52 14.67 13.30 12.28 12.61
Canara 11.88 12.50 12.66 12.78 11.22 13.50 13.25 14.10 13.43 15.38 13.76 12.40 10.63 10.56
Bank
Bank of 10.68 12.02 13.01 11.52 10.75 11.75 12.04 13.01 12.94 12.17 11.95 11.02 9.97 10.73
India
ICICI 11.44 11.10 10.36 11.78 13.35 11.69 13.97 15.53 19.41 19.54 18.52 18.74 17.70 17.02
HDFC 13.93 11.12 11.66 12.16 11.41 13.08 13.60 15.69 17.44 16.22 16.52 16.80 16.07 16.79
AXIS 10.65 10.90 11.21 12.66 11.08 11.57 13.73 13.69 15.80 12.65 13.66 17.00 16.07 12.07
Dhanlaxm 11.23 10.45 13.56 10.16 9.75 9.77 9.21 15.38 12.99 11.80 9.49 11.06 8.67 9.59
i Bank
Federal 10.63 11.23 11.48 11.27 13.75 13.43 22.46 20.22 18.36 16.79 16.64 14.73 15.14 15.46
Bank
CITI 11.04 11.30 11.11 10.78 11.33 11.06 12.00 13.23 18.14 17.31 16.03 15.90 16.49 15.30
Bank
Deutsche 14.55 17.35 14.42 16.22 12.74 10.62 15.05 15.25 16.45 15.03 14.12 14.08 14.84 15.62
Bank
Bank of 21.07 21.08 22.92 30.07 23.40 13.33 13.45 12.73 15.49 14.51 17.59 18.40 16.70 15.16
America
Standard 9.28 10.56 10.87 10.46 9.93 10.44 10.59 11.55 12.41 11.88 11.05 13.00 12.48 12.49
Chartered
Bank
HSBC 10.92 18.10 14.54 14.03 10.61 11.06 10.59 15.31 18.03 18.03 16.04 17.10 17.36 14.84
(Source: RBI, Profile of Banks)

To compare the performance outcome of CAR (%) during three periods (Basel I- before 2005, Basel II-
2005-2013, & Basel III-2013-2015) for all 15 banks enrolled in our study.
The descriptive statistics of CAR (%) for three different Basel time periods for all 15 banks are enumerated
below:

800 Volume 2 Issue 6 June 2017

DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
CAR(%) Basel 1-2001-05 Basel2-2005-2013 Basel3-2013-15
Mean 13.01 13.93 13.69
Standard Error 0.85 0.45 0.66
Median 12.22 13.66 14.07
Standard Deviation 3.29 1.75 2.56
Sample Variance 10.80 3.05 6.56
Kurtosis 9.09 -0.56 -1.21
Skewness 2.83 0.15 -0.30
Range 13.49 5.87 8.23
Minimum 10.29 11.18 9.13
Maximum 23.79 17.05 17.36
Sample Size(no of banks) 15.00 15.00 15.00
Largest(1) 23.79 17.05 17.36
Smallest(1) 10.29 11.18 9.13
Confidence Level (95.0%) 1.82 0.97 1.42

Then to compare the mean CAR (%) for all banks during three Basel norms periods using one way ANOVA
as shown below:
Anova: Single
Factor

SUMMARY
Groups Count Sum Average Variance
Basel1 15 195.16 13.01 10.80
Basel2 15 208.90 13.93 3.05
Basel3 15 205.41 13.69 6.56

ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 6.80 2.00 3.40 0.50 0.61 3.22
Within Groups 285.62 42.00 6.80

Total 292.42 44.00

Comparison of average CAR(%) performance in all banks during three different Basel norms time-periods
by one-way ANOVA showed that there was statistically no significant difference of average CAR (%)
among all 15 banks during three Basel time periods (F-Value 0.50; P-Value 0.61).
One-way Analysis of Variance for comparison of average CAR (%) of public banks only among three
different Basel time-periods

801 Volume 2 Issue 6 June 2017

DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
For public sector
banks only
Anova: Single
Factor

SUMMARY
Groups Count Sum Average Variance
Basel1 5 62.74 12.55 0.25
Basel2 5 64.97 12.99 0.42
Basel3 5 57.48 11.50 0.92

ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 5.9287975 2 2.96 5.58 0.02 3.89
Within Groups 6.37227812 12 0.53

Total 12.3010756 14

Above table showed that there was statistically significant change in average CAR (%) of public sector
banks with highest average CAR (%) in Basel II period and lowest average CAR(%) in Basel III time period
(F Value 5.58; P-Value 0.02).
Further comparison of average CAR (%) of private banks among three Basel time periods was also carried
out using one-way ANOVA as shown below:

Private Banks only

Anova: Single Factor

SUMMARY
Groups Count Sum Average Variance
Column 1 5 57.25 11.45 0.19
Column 2 5 73.32 14.66 5.46
Column 3 5 72.29 14.46 10.39

ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 32.38 2 16.19 3.03 0.09 3.89
Within Groups 64.18 12 5.35

Total 96.56 14

802 Volume 2 Issue 6 June 2017

DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
Above table showed that there was statistically significant change in average CAR (%) of private sector
banks during 3 Basel time periods with highest average CAR (%) in Basel II period and lowest average
CAR(%) in Basel I time period (F Value 3.03; P-Value 0.09).
Finally, comparison of average CAR (%) in Foreign banks among three Basel time periods was also carried
out using one-way ANOVA as shown below:

Foreign Banks
only
Anova: Single Factor

SUMMARY
Groups Count Sum Average Variance
Column 1 5 75.17 15.03 28.91
Column 2 5 70.61 14.12 2.98
Column 3 5 75.64 15.13 2.29

ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 3.09 2 1.54 0.14 0.87 3.89
Within Groups 136.72 12 11.39

Total 139.80 14

Above table showed that there was NO the banks shows adequate CAR level which shows
statistically significant change in average CAR the soundness of banks in India. In the 2008
(%) of foreign sector banks during 3 Basel time financial crisis, Indian banks not much affected by
periods with highest average CAR (%) in Basel III depression because of their high provisioning
period and lowest average CAR(%) in Basel I level. Despite bank’s CAR shows declining trends
time period (F Value 0.14; P-Value 0.87). but Indian banks must maintain the CAR level
prescribed under new Basel-III norms upto 2018-
Conclusion 19.
The paper concludes that in Public and
Private sector bank, there is statistically References:
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the highest CAR in the Basel-II norms but foreign Vol.1, pp.11-19
sector banks maintain its CAR in the current 2. Hasan Jameel Al-Saffar (2012), ‘The
period i.e. Basel-III norms. Dhanlaxmi Bank in Extent of Bank’s Commitments in Basel
the old private sector banks shows the least level Committee Regulations- the General
of CAR but it also above the minimum CAR level Frame of the study’ British Journal of
8% prescribed under Basel-I norms. Almost all
803 Volume 2 Issue 6 June 2017
DOI: 10.18535/afmj/v2i6.06
Page : 798-804
 Rakesh Kumar1, Account and Financial Management Journal ISSN: 2456-3374
Impact Factor: 4.614
2017
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804 Volume 2 Issue 6 June 2017

DOI: 10.18535/afmj/v2i6.06
Page : 798-804