Banks' capital adequacy meets global benchmark

The financials and profitability of domestic banks are now comparable with global benchmarks, according to the Reserve Bank of India.

In its Report on Trend and Progress of Banking in India 2004-05, RBI said financial performance of banks, especially public sector banks (PSBs), has improved markedly and match up to international standards. This is an indicator of financial stability as scheduled commercial banks constitute more than 75 per cent of total assets of the financial system.

To illustrate, local banks' capital adequacy ratio (CAR), which reflects the financial soundness of banks, was 12.8 per cent against the stipulated limit of 9 per cent by RBI.

The CAR of 78 banks of 88 banks was above 10 per cent in the country. Globally, CRAR of banks was in the range of 8.8 and 37.1 per cent. As per the RBI data, only two banks had capital adequacy ratio below the stipulated limit, which enjoy a share of 0.5 per cent of total banking sector's assets. 
 

A CUT ABOVE CAR of local banks vis-a-vis global peers
(In per cent)	March 31
	2004	2005
Public sector banks	13.2	12.9*
Private banks
Old private banks	13.7	12.5
New private banks	10.2	11.8
Foreign banks	15	14.1
Sheduled commercial banks	12.9	12.8*
Memo:
Emerging Markets
Argentina	11.2	11.6
Brazil	18.2	-
Mexico	14.1	13.7
Korea	11.3	-
South Africa	13.3	12.9
Developed countries
US	13	13.2
UK	12.4	12.3
Japan	11.1	11.6
Canada	13.4	13.3
Australia	10.1	10.5
Global range for 2004 (8.8 to 37.1) * Excluding the impact of conversion of a non-banking entity into a banking entity ** Data relating to developed countries relate to the 2003 and 2004, respectively. Source: GFSR (various issues)

Similarly return on total assets, defined as the ratio of net profit to total assets, in 2004-05 stood at 0.9 per cent vis-à-vis the global benchmark of -1.2 per cent and 6.2 per cent.

The ratio was highest for foreign banks followed by new generation private sector banks. Net interest margin (NIM) of Indian banks accrued to 2.9 per cent of total assets as compared to a global trend of 2 per cent. Among bank-groups foreign banks had the highest NIM followed by state-owned banks.

The funding volatility ratio, which measures the extent to which banks rely on volatile liabilities to fund their assets, was in the range of -0.11 to 0.23 as on 31 March 2005 against global standards of -0.71 and 0.11.