CAPITAL ADEQUACY RATIO

ASSIGNMENT (SESSION #3)

SUBMITTED BY: GROUP 4
PRATIK GAOKAR (PGP13105)
SAHIL DHINGRA (PGP13112)

SAURAV GARG

(PGP13052)

SHITAL KUMAR

(PGP13118)

CAR
Capital adequacy ratios (CARs) are a measure of the amount of a bank's core
capital expressed as a percentage of its risk-weighted asset
Capital adequacy ratio is defined as:

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free

reserves) - (equity investments in subsidiary + intangible assets + current & b/f
losses)
TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C)
hybrid debt capital instruments and subordinated debts
where Risk can either be weighted assets () or the respective national
regulator's minimum total capital requirement. If using risk weighted assets, CAR
10%.
The per cent threshold varies from bank to bank (10% in this case, a common
requirement for regulators conforming to the Basel Accords) is set by the national
banking regulator of different countries.
Two types of capital are measured: tier one capital ( above), which can absorb
losses without a bank being required to cease trading, and tier two
capital ( above), which can absorb losses in the event of a winding-up and so
provides a lesser degree of protection to depositors.

RISK WEIGHTING
Since different types of assets have different risk profiles, CAR primarily adjusts for assets that
are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR
calculation vary from country to country, but general approaches tend to be similar for
countries that apply the Basel Accords. In the most basic application, government debt is
allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of
calculating the CAR.

Risk weighting

Risk weighted assets - Fund Based : Risk weighted assets mean fund
based assets such as cash, loans, investments and other assets. Degrees
of credit risk expressed as percentage weights have been assigned by the
national regulator to each such assets.
Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying
the face amount of each of the off-balance sheet items by the Credit
Conversion Factor. This will then have to be again multiplied by the
relevant weightage.
Local regulations establish that cash and government bonds have a 0% risk weighting,
and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to
customers) have a 100% risk weighting.

EXAMPLE

Even though Bank would appear to have a debt-to-equity ratio of 95:5, or

equity-to-assets of only 5%, its CAR is substantially higher. It is considered
less risky because some of its assets are less risky than others.

PURPOSE OF CAR
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time
liabilities and other risks such as credit risk, operational risk etc. In the most simple
formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's
depositors and other lenders. Banking regulators in most countries define and
monitor CAR to protect depositors, thereby maintaining confidence in the banking system.

Gross NPA : Principal part of the NPA

Net NPA

: Principal + Interest Part of the NPA

Net NPA = Gross NPA - (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending
adjustment + Part payment received and kept in suspense account +Total provisions held)

Gross Advances : Principal Outstanding

Net Advances

: Principal + Interest Outstanding

Gross Advances Ratio Vs Net Advances Ratio

INDIAN BANKS

REASONS FOR INCONSISTENCY

On rise in credit demand

The industry credit growth accelerated to 16.6 % a YOY basis to Rs which was more than the
Reserve Bank of India's (RBI) forecast of 15 % YOY growth in bank advances in 2013-14.

Conversion of the excess statutory liquidity ratio (SLR)into loans as business picks up, the risk
weights will further shift from government securities to corporate bonds, making the capital
adequacy ratio look even worse.

NPA

Every increase in NPA level adds to risk weighted assets which warrant the banks to shore up
their capital base further. Capital has a price tag ranging from 12% to 18% since it is a scarce
resource.

CRAR falls to 13 per cent as of March 2014 from 13.88 per cent a year earlier

Public-sector banks have been the worst hit : Avg CRAR falls to 10.67 per cent as of the quarter
ended June, compared with 11.18 per cent in March.

Gross non-performing assets (NPAs) of public-sector banks increased to 4.1 per cent as of the
end of March from 3.6 per cent a year ago.

Net NPA as a proportion of net advances were 2.2 per cent, compared with 1.7 per during the
same period a year earlier

BASEL III

UNITED BANK OF INDIA (PSU)

UBI IN NEWS

Sudden exit of Archana Bhargava CMD, her voluntary retirement application being
accepted in 24 hours Feb 2014

Posted a loss of 1213.44 Cr in FY14

Union Bank of India's wilful defaulter order - 03 Sep 2014

Union Bank of India gains on plan to raise Rs 1,386 crore via QIP - 05 Sep 2014

See gross NPAs below 4%, NIMs at 2.9% by FY15-e: Union Bank - 11 Sep 2014

STEPS TAKEN BY UBI

Carrot & Stick approach

Incentives on repayment of dues and agreed on compromised settlements, but also unsettling defaulters with
legal notices and placing them in wilful defaulters list.

One-time-settlement scheme for loans up to Rs 10 lakh, which expired on March 31, to

facilitate easy repayment.

Promising fresh finances if the borrower repaid the dues.

UNITED BANK OF INDIA

700000

624325.0429

610070

560643.814

600000
488319.1011

14

Risk
Weighted
Assets

500000

12

13.28

13.05

12.8

12.69

10

400000

11.66

CAR

9.81

300000

6
200000

4
2

100000

71145.7

72796.3

59810

FY 2012

FY 2013

FY 2014

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

FY 2011

We see here that the RWA increase sharply in

2012 but the risk based capital does not, which
leads to a decline the CAR

Tier-1 Capital Ratio

10
9
8.9

8
7

7.56

8.79

8.16

United Bank of India

8.4

6.54

As on 31st March 2013 (in Millions)

5
4

Gross NPA: 29638

Gross Advances: 697081
Gross NPA /Gross Advance Ratio:4.25
Internal Capital Growth Rate: -17.8%

3
2
1
0
1

Risk
Based
Capital

INDUSIND BANK
Thousands

CAR
16.5
15.89

16
15.5

672.6

700
600

532.834

500

15.36

15.33

800

392.0331
400

307.1603

15
300
14.5

13.85

14

13.83

200
100

13.5

221.7961

21.3999

37.7406

44.5766

2010

2011

2012

81.8547

93.05

2013

2014

13

12.5
2010

2011

2012

2013

2014

Tier 1 Capital Ratio

16
13.78
14

12.71

12.29

Risk Based Capital

Risk Weighted Assets

RWA increases at a linear rate while risk based

capital does not increase at the same rate which
decreases the CAR of the bank.

11.37

12

9.65
10
8

IndusInd Bank

As on 31st March 2013 (in Millions)

4
2
0
2010

2011

2012

2013

2014

Gross NPA -- 4578

Gross Advances -- 446416
Gross NPA /Gross Advance Ratio 1.03

INDUSIND BANK

INDUSIND BANK NEWS

Exponentially increase in number of branches-650 branches by March

2014

Increase in credit demand

Raised capital Rs 2000 Cr to comply with Basel norms

Net profit of 1408 Cr in FY14. (Up by 40%).

70% increase In Share Price since Feb 2014.

Ratio of gross NPA to gross advances stood at 1.11% as on 30 June

2014 as against 1.12% as on 31 March 2014 and 1.06% as on 30 June
2013.

Ratio of net NPAs to net advances stood at 0.33% as on 30 June 2014

same as 0.33% as on 31 March 2014 and 0.21% as on 30 June 2013.

THANK YOU