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					    INTERNATIONAL JOURNAL Management (IJARM), RESEARCH
International Journal of Advanced Research in OF ADVANCED ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME
                            IN MANAGEMENT (IJARM)

ISSN 0976 - 6324 (Print)
ISSN 0976 - 6332 (Online)
                                                                               IJARM
Volume 4, Issue 3, September - December 2013, pp. 18-33
© IAEME: www.iaeme.com/ijarm.asp                                             ©IAEME
Journal Impact Factor (2013): 4.7271 (Calculated by GISI)
www.jifactor.com




 AN ASSESSMENT OF RISK MANAGEMENT IN BANKING SECTOR:
 A STUDY WITH SPECIAL REFERENCE TO PUBLIC AND PRIVATE
                 SECTOR BANKS IN INDIA

               *Dr. C. MAHADEVA MURTHY and **Prof. S.N. PATHI
  *Chairman & Associate Professor, Department of Studies and Research in Management,
   Karnataka State Open University, Mukthagangotri, Mysore-570006, Karnataka, India.
       **Professor, Department of Business Administration, Berhampur University,
                          Berhampur- 760007, Odisha, India.


ABSTRACT

        In banking sector risk management is a key issue connected to the financial system stability.
Banking activities is becoming more complex, compounded by exploding technological
capabilities, expanding product offerings and deregulation of competition. In other words,
banking is a business of risk. For this reason, efficient risk management is extremely
required. In this connection, banks have been moving towards the use of sophisticated models
for measuring and managing risks. The Indian banking system is better prepared to adopt
Basel II than it was for Basel I due to better risk awareness. The Basel II Accord had led the
banks to new prudential norms like capital adequacy and identification of bad debts. Recently
many banks have appointed senior managers to oversee a formal risk management function.
The effective risk management lies with the ability to gauge the risks and to take appropriate
measures. In the light of this, an analysis was carried out to highlight the NPAs position of
Public and Private Sector Banks in India. The trend of NPAs in public and private sector
banks in the last nineteen years shows that the level of NPAs in relation to the total assets has
declined. The extent of NPA is comparatively higher in public sector banks compare to the
private sector and foreign banks. The study also focuses on the risk management practices of
Public and Private Sector Banks after the implementation of Basel II with the help of capital
adequacy ratio for a period of 2007 to 2012. Hence an efficient risk management system is
needed.

Key words: Risk Management, Financial System, Basel II, Capital Adequacy Ratio, NPAs
Public and Private Sector Banks.
                                                 18
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

INTRODUCTION

        The Indian Banking industry has drastically changed due to liberalization and
deregulation process started in 1991. The financial system is the lifeline of the economy. The
changes in the economy get mirrored in the performance of the banking industry. In order to
strengthen the performance of banking sector, it is adopting international best practices with
its vision. Rising global competition, increasing deregulation, introduction of innovative
products and delivery channels have given rise to risk in banking sector. The success of risk
management lies in the ability to guage the risks and take appropriate measures. Several
prudential and provisioning norms have been introduced. Under Basel II accord, capital
allocation will be based on the risk inherent in the asset. Banks generally face various risks
such as credit risk, market risk, operational risk, liquidity risk etc. of all the type of risks,
credit risk is the most important one. Credit risk is all about loans and their defaults, and loan
transactions account for more than 50.00 per cent of all banking activities. Credit risk
management is a structured approach to managing uncertainties through risk assessment,
developing strategies to manage it, and mitigation of risk using managerial resources. The
strategies include transferring to another party, avoiding the risk, reducing the negative
effects of the risk, and accepting some or all of the consequences of particular risk. The NPA
concept was introduced in India by the Reserve Bank of India with effect from 1st April 1992
and prudential norms were issued regarding the methods of identifying NPAs, classification
and income recognition. The NPAs is in reality works out a ratio of non-performing credit to
total credit. Bankers are now required to recognize such loans faster and then classify them as
problem assets. The basic factor to determine whether an account is NPA or not, is the record
of recover and not the availability of security. Before making a further analysis on NPAs and
its causative factor, an understanding of how banks classify their advances is necessary.

RISK STRUCTURE

        The word ‘risk’ is derived from an Italian word ‘resicare’ which means ‘to dare’. It
means risk is more a ‘choice’ than a ‘fate’. An extension of this analogy reveals risk is a
possibility of loss or injury perils and the degree of uncertainty in return. Banks in the process
of financial intermediation are facing with one or more of the following risk categories.
    • Credit Risk
    • Market Risk
    • Operational Risk
        A strong banking sector is important for flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. Non-Performing Asset (NPA) is
one of the major concerns for banks in India. NPAs reflect the performance of banks. A high
level of NPAs suggests high probability of a large number of credit defaults that affect the
profitability and net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders’
value. Assets which generate periodical income are called as performing assets. Assets which
do not generate periodical income are called as non-performing assets. NPAs are further
classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI.
An asset, including a leased asset becomes nonperforming when it ceases to generate income
for the bank for a specified period of time.


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International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

        The quality of Indian banks assets is likely to deteriorate over the next two years. This
will be driven by the slowdown in the economy, and by the aging of loans made in recent
years. The NPAs are considered as an important parameter to judge the performance and
financial health of banks. The level of NPAs is one of the drivers of financial stability and
growth of the banking sector. The Financial companies and institutions are nowadays facing a
major problem of managing the Non Performing Assets (NPAs) as these assets are proving to
become a major setback for the growth of the economy. NPAs in simple words may be
defined as the borrower does not pay principal and interest for a period of 180 days.
However, it is taken into consideration now that default status would be given to a borrower
if dues are not paid for 90 days.
        In banking business evaluation of capital position a bank must consider both the static
and dynamic costs. The static costs and perhaps the dynamic costs, depend in part on the
penalties regulators impose for inadequate capital ratio. The levels and changes in capital
position variety of non-regulatory costs have associated. During the seventies there were no
regulations that specified minimum capital ratios. Regulators dissatisfied with many banks
capital ratio, at the beginning of the eighties. In 1981 U.S. regulators specified minimum
capital to asset ratios for all banks. As a result, in 1983, banks were required to raise their
capital-to asset ratios to some pre-specified minimum. Subsequently other counties followed.
The Basel committee on Banking Supervision (BIS) was formed in response to the messy
liquidation of a Frankfurt bank in New York. Under the auspices of the Bank for International
Settlement (BIS) Basel I refer to a round of deliberations by central banks from around the
world. During 1988 BIS published a set of minimal capital requirements for banks. This is
also known as 1988 Basel Accord. In 1992 this was enforced by law in (G-10) countries. In
India, Capital Adequacy Ratio (CAR) was introduced from April 1992.

THE BASEL I NORMS

        India began implementing the Basel I in April 1992. The standards are almost entirely
addressed to credit risk, the main risk incurred by banks. The document consists of two main
sections, which cover-
        a. The definition of capital; and
        b. The structure of risk weights.
        Based on the Basel norms, the RBI also issued similar capital adequacy norms for the
Indian banks. According to these guidelines, the banks will have to identify their Tier- I and
Tier-II capital and assign risk weights to the assets. Having done this they will have to assess
the Capital to Risk Weighted Assets Ratio (CRAR). Banks in India have been making efforts
to reduce their NPAs post Basel I implementation and thereafter.

Tier-I Capital
   • Paid-up capital
   • Statutory Reserves
   • Disclosed free reserves
   • Capital reserves representing surplus arising out of sale proceeds of assets
Equity investments in subsidiaries, intangible assets and losses in the current period and those
brought forward from previous periods will be deducted from Tier I capital.


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International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

Tier-II Capital
   • Undisclosed Reserves and Cumulative Perpetual Preference Shares
   • Revaluation Reserves
   • General Provisions and Loss Reserves

Basel II NORMS
        Basel II is the second of the Basel Accords recommended for banking laws and
regulations issued by the BCBS and BIS. The focus of Basel II is on risk determination and
quantification of credit, market and operational risks faced by banks. With this objective, on
June 26, 2004, The Basel Committee on Banking Supervision released “International
Convergence of Capital Measurement and Capital Standards: A revised Framework”, which
is commonly known as Basel II Accord was introduced. Basel 1 initially had Credit Risk and
afterwards included- Market Risk. In Basel II, apart from Credit & Market Risk; Operational
Risk was considered in Capital Adequacy Ratio calculation.
        Basel II norms consist of three pillars. The first pillar, minimum capital requirements,
develops and expands on the standardized 1988 rules. The risk weighting system describes
and replaces the earlier system by using external credit ratings. The second pillar is the
supervisory review of capital adequacy which seeks to ensure that the bank’s position is
consistent with its overall risk profile and strategy, and as such encourages early supervisory
intervention. Supervisors want the ability to require banks which show a greater degree of
risk to hold a minimum capital in excess of 8.00 per cent. The third pillar, market discipline,
encourages high disclosure standards and enhances the role of market participants in
encouraging banks to hold adequacy capital.

REVIEW OF LITERATURE

         There are numerous empirical studies conducted on NPAs and Basel Accord in India
as well as abroad. Present review deals with the empirical studies conducted in Indian context
on Non-performing Assets and Basel Accord of Public and Private Sector banks. The
following are the various studies in this field.
         Jackson (1999) points out that one of the reasons why the Basel Committee adopted a
single standard for internationally active banks is that the framework would strengthen the
soundness and stability of the international banking system by encouraging organizations to
boost their capital positions. Moreover, the framework established a structure that was
intended to: (1) make regulatory capital more sensitive to differences in risk profiles among
banking organizations; (2) take off-balance sheet exposures explicitly into account in
assessing capital adequacy; and (3) lower the disincentives to holding liquid, low risk assets.
         Rao (2004) views that Basel I norms aim at ensuring capital adequacy of banks as a
proportion of the risk-weighted assets. Vyas et.al (2007) studied the impact of capital
regulation norms like Basel II on the credit growth of Indian banks and concluded that capital
regulations do not seem to affect credit growth in spite of the growing concerns about banks’
stability.
         Rekha (2005) carried out the study to examine non-performing assets, credit risk
management practices, Basel II and risk based supervision between public and private sector
banks. The period of the study is 1994 to 2003. She opined that 70.00 per cent of the risk is
from credit risk, remaining 30.00 per cent is from market risk and operational risk. She
suggested that ‘better portfolio equilibrium, establishing risk management information
                                              21
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

system, redesigning the internal rating system and early warning signals can be the better risk
management methods.
        Bodla and Verma (2009) examined the implementation of the risk management
framework and operational risk management framework by the commercial banks. Their
study revealed that irrespective of sector and size of bank, the risk management and the
operational risk management framework of banks in India are on the right track and they are
based on the RBI’s guidelines. Credit risk is the most important risk faced by the scheduled
commercial banks in India they revealed. They examined many banks have designed
operational risk management framework on the lines of Basel Accords.
        Goyal (2010) focuses on risk management process, challenges and opportunities in
implementation of Basel II in Indian banking industry. He opined that ganging risk and
taking appropriate position will lead to success. He revealed that Indian banks have adopted
best structures, processes and technologies available worldwide and have moved from
strength to strength.
        Kumar (2010) conducted a study in Delhi to find out the various methodologies used
by the banks in their operational risk management activity complaining the rules and
regulations. The study reveal that the operational risk management functions is
predominantly gaining importance in banking operations in India along with credit risk. He
concluded that the banks are ready to improve their existing risk management framework in
accordance with Basel II to deal with risks more effectively.
        Ayyappan and Ramachandran (2011) conducted a study of 22 public sector and 15
private sector banks to predict the determinants of the credit risk in the Indian Commercial
banking sector by using an econometric model. The outcome of the study is the non-
performing assets had a strong and statistically significant positive influence on the current
non-performing assets. They opined that the problem of NPA is not only affecting the banks
but also the whole economy.
        Mehra (2011) focused on operational risk by using advanced measurement approach
for analysis. The study reveals that operational risk has higher awareness but given less
importance. Small sized public sector and old private sector banks were lagging behind. The
Study revealed that there is a wide gap between Indian banks and the AMA compliant banks
worldwide in operational risk management practices.

OBJECTIVES OF THE STUDY

The present study attempts to achieve the following objectives
   1. To analyze the risk structure and Basel I & II norms of banking business;
   2. To assess the trend of NPAs position in Indian Public and Private Sector Banks an
      overview;
   3. To highlight the NPAs position of selected countries in the world;
   4. To predict the status of capital adequacy ratio of Basel I and II of both public and
      Private Sector Banks in India; and
   5. To offer findings, suggestions in the light of the study.

RESEARCH METHODOLOGY

       Research is considered as journey from unknown to the known. Methodology is the
way to solve the research problem systematically. The present study is purely based on data
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International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

gathered from secondary sources. The required secondary data constitutes the main source of
information, suitable for the purpose of the present study. The sources of secondary data were
annual publications of Reserve Bank of India, RBI Bulletins, Indian Banks Association
Bulletins, Mumbai, National Institute of Bank Management (NIMB), Pune, the journal of
Indian Institute of Banking & Finance, Annual Reports of various banks, daily newspapers
such as Financial Experts, Business Line, and Business Standards were also used for the
purpose of the study and also various referred articles, books and journals and data available
on internet and other sources has also been used. Major guidelines issued by RBI from time
to time were studied in depth.
        In the light of the objectives of the study, the study is divided into the components of
risk management as,
        1) NPAs Position: Public and Private Sector Banks;
        2) Countries NPAs Position; and
        3) CAR of Public and Private Sector Banks – Basel I and Basel II.
        The methodology used to analyze the NPAs of public and private sector banks is
percentages. The NPAs position in public and private sector banks has been taken in the
following categories.
        1) Gross NPAs; and
        2) Net NPAs.
            The data has been collected from the RBI website for the period of nineteen years
from 1993-94 to 2011-12.
             The study also divided the component of CAR of Public sector and Private sector
banks in the following categories.
        1. SBI and Associates;
        2. Nationalized Banks;
        3. Old Private Sector Banks; and
        4. New Private Sector banks.
        The study analyses Countries NPAs position, it also depicts trends in Capital
Adequacy Ratio of both Public Sector Banks and Private Sector Banks under Basel I and
Basel II in India.

Analysis and Interpretation

Part-A: Non-performing Assets (NPAs) Position

   (i)      NPAs Position in India
        NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability and net-worth of
banks and also erodes the value of the asset. The NPA growth involves the necessity of
provisions, which reduces the overall profits and shareholders· value. The issue of Non
Performing Assets has been discussed at length for financial system all over the world. The
problem of NPAs is not only affecting the banks but also the whole economy. In fact high
level of NPAs in Indian banks is nothing, but a reflection of the state of health of the
industry and trade.
        Table No. 1 exhibits the trend of non-performing assets as a percentage to total assets
in Public and Private Sector Banks in India during last Nineteen years. It is clear from the
table that the percentage of gross NPAs of public sector banks is decreased from 24.80 per
                                              23
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

cent to 3.30 per cent from 1993-94 to 2011-12. The gross NPAs in private sector banks is
also decreased from 6.23 per cent to 2.10 per cent from 1993-94 to 2011-12. Similarly, the
percentage of net NPAs of public sector banks is decreasing in all years except in the year
1996-97. The percentage of net non-performing assets in private sector banks was 3.36 per
cent in 1993-94 and it has come down to 0.50 per cent in the year 2011-12. While the
declining trend in NPAs is a positive sign for management of public sector banks, a
comparison with the private sector banks reveals that the ratio of gross and net NPAs has
been consistently higher than private sector banks. Thus, the relative efficiency of public
sector banks in managing NPAs is poor in comparison to private sector banks.

                                     Table No.1
           NPAs Position in Public and Private Sector Banks: An Overview
      Year             Public Sector Banks                Private Sector Banks
                    Gross NPAs          Net NPAs         Gross NPAs          Net NPAs
    1993-94             24.80              14.5              6.23               3.36
    1994-95             19.50              10.7              6.47               4.10
    1995-96             18.00              8.90              7.45               4.34
    1996-97             17.84              9.18              8.49               5.37
    1997-98             16.02              8.15              8.67               5.26
    1998-99             15.89              8.13              10.44              6.92
    1999-00             13.98              7.42              8.17               5.14
    2000-01             12.37              6.74              8.37               4.44
    2001-02             11.09              5.82              9.64               5.73
    2002-03             9.36               4.54              8.08               4.95
    2003-04             7.79               2.90               5.80               1.32
    2004-05             5.53               2.60              3.90                1.85
    2005-06             3.64               1.22              2.60                1.09
    2006-07             2.66               1.01              2.40                0.97
    2007-08             2.23               1.00              2.70                1.20
    2008-09             2.00               0.90              3.20                1.50
    2009-10             2.20               1.10              2.74               1.01
    2010-11             2.40               1.20              2.25               0.67
    2011-12             3.30              1.70               2.10               0.50
Source: Report on Trend and Progress of Banking in India from 1993-2012.




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International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
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(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

                                                                                      Graph No.1
                                                                          NPAs Position of Public Sector Banks
                                                               Gross and Net NPAs Position of Public Sector Banks
                                24.8

                           25              19.5



                                                               17.84
                                                     18
                           20

                                                                          16.02

                                                                                     15.89

                                                                                                13.98
                                    14.5




                                                                                                            12.37
    Per centage




                           15




                                                                                                                        11.09
                                              10.7




                                                                                                                                                                                                                                                Gross NPAs




                                                                                                                                    9.36
                                                                  9.18
                                                        8.9



                                                                             8.15

                                                                                        8.13




                                                                                                                                                  7.79
                           10                                                                      7.42                                                                                                                                         Net NPAs
                                                                                                               6.74

                                                                                                                           5.82




                                                                                                                                                                         5.53
                                                                                                                                      4.54




                                                                                                                                                                      3.64

                                                                                                                                                                    2.66




                                                                                                                                                                     3.3
                                                                                                                                                                   2.23
                                                                                                                                                    2.9

                                                                                                                                                                    2.6
                            5




                                                                                                                                                                   2.4
                                                                                                                                                                   2.2
                                                                                                                                                                1.22

                                                                                                                                                                1.01




                                                                                                                                                                  1.7
                                                                                                                                                                1.2
                                                                                                                                                                1.1
                                                                                                                                                                  2
                                                                                                                                                                0.9
                                                                                                                                                                1
                            0




                                                                                                                                    Years




                                                                                     Graph No.1.A
                                                                          NPAs Position of Private Sector Banks

                                                                             Gross and Net NPAs position of of Private Sector Banks
                                                                                     10.44




                           12
                                                                                                                         9.64
                                                                          8.67
                                                               8.49




                           10
                                                                                                             8.37
                                                                                                 8.17




                                                                                                                                     8.08
                                                     7.45




                                                                                         6.92
                                           6.47




                            8
                                6.23




                                                                                                                             5.73


                                                                                                                                                   5.8
                                                                   5.37

                                                                              5.26



                                                                                                     5.14




                                                                                                                                           4.95
                                                                                                                 4.44




                            6
                                                        4.34




                                                                                                                                                                                                                                                Gross NPAs
                                              4.1
             per centage




                                                                                                                                                                3.9
                                   3.36




                                                                                                                                                                                                        3.2

                                                                                                                                                                                                                  2.74




                            4                                                                                                                                                                                                                   Net NPAs
                                                                                                                                                                                              2.7
                                                                                                                                                                          2.6




                                                                                                                                                                                                                            2.25
                                                                                                                                                                                    2.4
                                                                                                                                                                   1.85




                                                                                                                                                                                                                                      2.1
                                                                                                                                                         1.32




                                                                                                                                                                                                           1.5
                                                                                                                                                                             1.09




                                                                                                                                                                                                                     1.01
                                                                                                                                                                                       0.97

                                                                                                                                                                                                 1.2




                                                                                                                                                                                                                               0.67




                            2
                                                                                                                                                                                                                                         0.5




                            0
                                1993-94

                                           1994-95

                                                     1995-96

                                                                1996-97

                                                                           1997-98

                                                                                      1998-99

                                                                                                  1999-00

                                                                                                              2000-01

                                                                                                                          2001-02

                                                                                                                                      2002-03

                                                                                                                                                    2003-04

                                                                                                                                                                2004-05

                                                                                                                                                                          2005-06

                                                                                                                                                                                    2006-07

                                                                                                                                                                                              2007-08

                                                                                                                                                                                                        2008-09

                                                                                                                                                                                                                  2009-10

                                                                                                                                                                                                                            2010-11

                                                                                                                                                                                                                                      2011-12




                                                                                                                        Years




                                                                                                                                           25
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

International Comparisons of NPA levels
        In order to get a global picture it is essential to look at the NPAs in the different
countries of the world. Since the concept of NPA developed in India only in the post -reform
era, it would be useful to look at recent figures rather than adhere to a historical account.
While comparing the NPA levels of different countries, it should be remembered that the
features relating to NPA reporting/evaluation practices are not uniform across the globe. In
some countries, the NPA level may be low because losses are written off at an early stage &
vice-versa.
        Bank Non-performing loans to total gross loans are the value of non-performing loans
divided by the total value of the loan portfolio. The loan amount recovered as non-performing
should be the gross value of the loan as recorded on the balance sheet, not just the amount
that is overdue. The table No. 2 indicates the International Comparisons of NPA level of
different countries from 2007-2012. In the year 2007 Malaysia had the highest NPA of 6.50
per cent. This was followed by Turkey and India and their percentage stood at 3.30 and 2.70
respectively. In the year 2012, USA stands first with holding 3.90 per cent of level of NPA,
India stayed in Second with having 3.00 per cent of level of NPA, further followed by
Turkey-2.50 per cent, Japan-2.40 per cent, Malaysia-2.20 per cent, Australia-1.90 per cent,
Korea-1.50 per cent, Hong Kong-0.60 per cent. Therefore proper measures need to be taken
to reduce the percentage of NPA.


                                       Table No. 2
                                 Countries NPAs Position (%)
      Countries        2007       2008        2009       2010        2011       2012

         USA            1.4        3.0         5.4        4.9         4.1        3.9

         India          2.7        2.4         2.4        2.5         2.3        3.0

        Turkey          3.3        3.4         5.0        3.5         2.6        2.5

         Japan          1.5        1.4         1.6        2.5         2.4        2.4

       Malaysia         6.5        4.8         3.6        3.4         2.7        2.2

       Australia        0.6        1.3         2.0        2.2         2.0        1.9

        Korea           0.7        1.1         1.2        1.9         1.4        1.5

      Hong Kong         0.8        1.2         1.6        0.8         0.7        0.6
          Source: www.worldbank.org




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International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
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(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

                                                         Graph No.2
                                                    Countries NPAs position


                                            Countries NPAs Position




                                                                       6.5
                   7
                                5.4




                   6
                             4.9




                                                                           4.8
                                                  5
                   5                                                                                                             2007
                                   4.1
     Per centage




                                  3.9




                                                                              3.6
                                                                                                                                 2008

                                                  3.5
                                                 3.4




                                                                             3.4
                                                 3.3
                   4
                                                                                                                                 2009
                                           2.7




                                                                                    2.7
                         3




                                             3



                                                      2.6
                                          2.5




                                                      2.5


                                                                2.5
                                         2.4
                                         2.4




                                                                2.4
                                                                2.4
                                         2.3




                                                                                 2.2


                                                                                                  2.2
                   3
                                                                                                                                 2010




                                                                                                1.9


                                                                                                               1.9
                                                                                                2
                                                                                                2
                                                             1.6




                                                                                                                           1.6
                                                            1.5




                                                                                                             1.5
                       1.4




                                                            1.4




                                                                                                            1.4
                                                                                            1.3
                   2




                                                                                                           1.2



                                                                                                                         1.2
                                                                                                                                 2011




                                                                                                          1.1



                                                                                                                      0.8

                                                                                                                      0.8
                                                                                                        0.7




                                                                                                                     0.7
                                                                                          0.6




                                                                                                                     0.6
                   1                                                                                                             2012

                   0
                         USA             India   Turkey      Japan     Malaysia           Australia      Korea        Hong
                                                                                                                      Kong
                                                          Countries




                               dequacy
Part-B: Trends in Capital Adequacy Ratio (      (CAR) values in India
        It is noted that most of the earlier studies focus on Basel II norms for Indian banks
and explain the conceptual framework. Little attention is paid to analysis of CAR that can
                                       change
help in (i) identifying why there is a change in CAR between and among banks from one year
to the next and (ii) ascertaining how the banks will be affected if the CAR is maintained at
lower than the regulatory level. This can be inferred from the recent crises faced by US banks
                       o
– many were forced to close down. In the year 2008, 25 banks became bankrupt including the
big ones like Lehmann Brothers. The present (2011) debt crisis of the US government may
also bring in some problems in the banking sector in view of lower ratings awarded by the
rating agencies.
        This study tries to identify the status of CAR of the commercial banks in India,
examine the trends and ascertain the impact of Basel II norms on CAR. It also analyzes the
                                                                            throug
implementation of CAR by banks in India. The situation is displayed through tables and
graphs and also discussed. The study pertains to public, private and foreign commercial
banks operating in India. The data used for the study are secondary, drawn from published
                                                                  issued
work and the RBI’s progress reports on banks and the guidelines issued by the BIS.

Capital Adequacy Standards in India
        Capital adequacy is deemed to control risk appetite of the bank by aligning the
incentives of bank owners with depositors and other creditors. In this background next we
examine the CAR of Public and Private Sector Banks. Public Sector banks include SBI and
subsidiaries and Nationalized Banks and Private Sector banks include old private sector
banks and new private sector banks.


                                                                      27
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

Public and Private Sector Banks Capital Adequacy Ratio - Basel I

       CAR is a measure of a banks’ capital and it is expressed as a percentage of a bank’s
risk weighted credit exposures. Also known as “Capital to Risk Weighted Assets Ratio
(CRAR)
                       CAR = Tier one Capital + Tier Two Capital
                                    Risk Weighted Assets

        Ever since its introduction in 1988, capital adequacy ratio has become an important
benchmark to assess the financial strength and soundness of banks.
        We examine the CAR of Public and Private Sector banks (operating in India) for the
years 2007 to 2012 as per Basel norms I and II. The banks are grouped into four: SBI and its
subsidiaries, nationalized banks, old private sector banks, new private sector banks. Table
No. 3 show the CAR values of Public and Private Sector banks. SBI and subsidiaries CAR
ratio was increased from 12.21 per cent to 12.25 per cent from 2007 to 2012 as against
Nationalized banks showed a increasing trend from 12.21 per cent to 13.47 per cent from
2007 to 2012. In case of old private sector banks CAR increased from 12.77 per cent to
14.55 per cent from 2007 to 2012. New Private sector banks CAR also increased from 12.47
per cent to 16.87 per cent from 2007 to 2012. New Private Sector banks, on the other hand,
during 2012 have the highest average and also maximum variability in CAR with 16.87 per
cent, followed by the old private sector banks with 14.55 per cent and Nationalized Banks
with 13.47 per cent. The lowest capital adequacy ratio was found in SBI & Subsidiaries with
13.31 per cent. To conclude, private sector banks capital adequacy ratio is more than public
sector banks.

                                  Table No. 3
                 Group Average CAR for Banks - Basel I: 2007 to 2012


 SL                                    2007         2008    2009    2010    2011    2012
                  Banks
 No.


  1    SBI & Subsidiaries              12.21        12.81   12.07   13.31   11.87   12.25


  2    Nationalized banks              12.21        11.84   11.87   12.03   12.15   13.47


  3    Old private sector banks        12.77        13.59   13.76   14.18   13.15   14.55


  4    New private sector banks        12.47        14.12   15.19   16.76   16.52   16.87

Source: Report on Trend and Progress of Banking in India.




                                               28
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
                                                                          r
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

                                      Graph No. 3
                     CAR of Public and Private Sector Banks – Basel I

                   Capital Adequacy Ratio of Public and Private Sector Banks - Basel I




                                                                                               16.87
                                                             16.76




                                                                               16.52
                                            15.19
           18




                                                                                           14.55
                                                        14.18
                             14.12



                                         13.76
                            13.59




                                                                                         13.47
                                                      13.31




                                                                       13.15
                           12.81
           16
                 12.77
                12.47




                                                                                       12.25
                12.21
                12.21




                                                                     12.15
                                     12.07




                                                    12.03
                                     11.87




                                                                     11.87
                         11.84
           14                                                                                                 SBI & Subsidiaries banks
           12
                                                                                                              Nationalized Old Private sector banks
           10
            8                                                                                                 Nationalized New private sector banks
            6                                                                                                 Nationalized New private sector banks
            4
            2
            0

                 2007     2008        2009           2010             2011              2012
                                             Years


Public and Private Sector Banks Capital Adequacy Ratio - Basel II

        Table No. 4 depicts the CAR for banks on Basel II. Compared to Basel I, the CAR is
lower under Basel II possibly due to proper maintenance of operational risk being included
    er
under the latter. Surprisingly this is same in the case of private banks also. It may be noted
                                                                                 cent
that the variation in CAR is minimal in for public sector banks with 14.12 per cent, followed
                                                                          acy
by private sector banks with 16.66 per cent. The highest capital adequacy ratio is found in
New Private Sector Banks and its percentage stood at 17.40.

                                    Table No. 4
                  Group Average CAR for Banks - Basel II: 2009 to 2012

        SL
                              Banks                                       2009                         2010         2011           2012
        No.

         1                    ries
                SBI & Subsidiaries                                        13.34                    13.51            12.66         13.70

         2      Nationalized banks                                        13.32                    13.29            13.49         13.03

         3      Old private sector banks                                  14.54                    14.90            14.15         14.12

         4      New private sector banks                                  15.34                    17.40            16.28         16.66

                             rogress
Source: Report on Trend and Progress of Banking in India.




                                                                     29
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
                                                                          r
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

                                     Graph No. 4
                    Group Average CAR for Banks - Basel II: 2009 to 2012


                         CAR of Public and Private Sector Banks – Basel I



                                     17.4




                                                                           16.66
                                                        16.28
     18
                 15.34
              14.54




                              14.9




                                                14.15




                                                                   14.12
     16
                          13.51




                                              13.49
           13.34
           13.32




                          13.29




                                                                  13.7
                                                                13.03
                                            12.66
     14
                                                                                   SBI & Subsidiaries
     12
                                                                                   Nationalized banks
     10
                                                                                   Old private sector banks
      8
                                                                                   New private sector banks
      6

      4

      2

      0
            2009            2010             2011                2012


                                Years


FINDINGS OF THE STUDY

The following are the major findings of the study

                                                                                   cen
   1. There is a decline in the percentage of NPAs from 14.50 per cent to 1.70 per cent in
      public sector banks over a period of study.
   2. There is also decline the percentage of NPAs from 3.36 per cent to 0.50 per cent in
                                 1993
      private sector banks from 1993-94 to 2011-12.
   3. The level of NPA in public sector banks hold larger share compared to private sector
      banks.
   4. It is found that USA stands first among all the countries in terms of percentage of
      NPA with 3.9 per cent in the year 2012.
   5. India stands Second next to USA with holding 3.00 percentage of NPA level then
                             2.50            Japa                          2.20
      followed by Turkey-2.50 per cent, Japan-2.40 per cent, Malaysia-2.20 per cent,
                1.90            Korea-1.50 per cent, Hong Kong-0.60 per cent in the year
      Australia-1.90 per cent, Korea                              0.60
      2012.
                                                                                16.87
   6. The Average CAR - Basel I is more in New Private Sector Banks that is 16. per
      cent followed by Old Private Sector Banks with 14.55 per cent.
   7. The Average CAR - Basel II is more in New Private Sector Banks that is 17.40 per
      cent then the old Private Sector Banks with 14.90 per cent.


                                                                            30
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

SUGGESTIONS

The following are the major suggestions for the study

  1.    The level of NPA in Public Sector is very much high when compared to Private
        Sector Banks, therefore proper management is required to reduce the percentage of
        NPA.
  2.    The Banks should try to achieve better portfolio equilibrium so that proper
        supervision will exist.
  3.    The government has to lay more emphasis in providing finance to the wide range of
        activities in the services sector.
  4.    An objective and reliable database has to be built up for which bank has to analyze its
        own past performance data relating to loan defaults, operational losses etc.
  5.    It is also need for building in a risk orientation in individual officers at the operating
        level, to create awareness about credit assessment skills and risk mitigation processes
        is needed.
  6.    Public sector banks need to set up modern IT infrastructure in place within one two
        years in line with foreign and new generation private banks. There is a need of
        centralized database so that core banking solution can be implemented.
  7.    Early warning signals for initiating sickness must be identified and proactive remedial
        action should be taken up in time.
  8.    Banks to look at the three-fold method of arresting fresh inflows of NPAs, reducing
        existing NPAs and bringing about a culture of doing away with NPAs.
  9.    Banks should take legal measures against willful defaulters to recovery of debts.
        Though, the legal measures are lengthy, complex and expensive, they are the only
        way to recover the debts from them.
  10.   Regular contact with borrowers and regular monitoring of the accounts is very
        necessary.
  11.   Risk taking systems should be developed to cover newer risks.
  12.   Existing NPAs should be taken seriously and banks should set up speedy recovery
        cells and task forces to deal with them.
  13.   Branches having sizable NPAs should be identified and skilled and trained personnel
        should be placed there.
  14.   Doubtful and loss assets should be reviewed periodically to explore possibilities for a
        quick write-off in cases where they are fully provided for.
  15.   Incentives schemes for employees and interest discounts for prompt repayments
        should be adopted by banks to bring about a culture of zero NPAs.

CONCLUSION

       The NPA is the root cause of the global financial crisis that we observed recently. The
world is still trying to recover from the after-effects of the crisis. The problem of NPA has
received considerable attention after the liberalization of the financial sector in India. The
NPAs have always been a big worry for the banks in India. It is just not a problem for the
banks; they are bad for the economy too. The extent of NPA is comparatively higher in
public sectors banks. To improve the efficiency and profitability, the NPAs have to be
scheduled. Various steps have been taken by government to reduce the NPAs in both Public
                                               31
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

and Private Sector Banks in India. This has led to decline in the level of NPAs of the Indian
banking sector. The NPAs level of our banks is still high as compared to the international
standards. It is highly impossible to have zero percentage NPAs. But at least Indian banks can
try competing with foreign banks to maintain international standard. One cannot ignore the
fact that a part of the reduction in NPAs is due to the writing off bad loans by the banks. The
Indian banks should take care to ensure that they give loans to creditworthy customers as
prevention is always better than cure.

REFERENCES

1.    Gupta and Meera Mehta, “Indian banks and Basel - II: An Econometric Analysis”,
      Indian Journal of Finance, June 2011, pp.11-19.
2.    Yogieta S. Mehra., (2011), Presented paper titled “Operational Risk Management in
      Indian Banks: Impact of Ownership and Size on Range of Practices for Implementation
      of Advanced Measurement” at the “The Thirteenth Annual Conference on Money and
      Finance in the Indian Economy”.
3.    Krishn A. Goyal., (2010). Risk Management in Indian Banks: Some Emerging Issues,
      Int. Eco. J. Res., Vol. 1, Issue 1, pp. 101-109.
4.    Rekha, Arunkumar., (2005). Risk Management in Commercial Banks – A Case Study
      of Public and Private Sector Banks, Ninth Capital Market Conference, Indian Institute
      of Capital Market, Mumbai.
5.    Bodla, B.S. and Verma Richa., (2009). Credit Risk Management Framework at Banks
      in India, the IUP Journal of Bank Management, Vol. VIII, Issue 1, pp. 47-72.
6.    Alfriend, M, “International Risk-based Capital Standards; History and Explanation”,
      Federak Reserve Bank of Richmond Economic Review, December 1988, pp.28-34.
7.    Gupta and Meera Mehta, “Indian banks and Basel - II: An Econometric Analysis”,
      Indian Journal of Finance, June 2011, pp.11-19.
8.    A Study of Non-Performing Assets on Selected Public and Private Sector Banks
      Priyanka Mohnani1, Monal Deshmukh- International Journal of Science and Research
      (IJSR), India Online ISSN: 2319‐7064.
9.    Operational risk management in Indian banks: impact of ownership and size on range of
      practices for implementation of advanced measurement approach - Dr. Yogieta S.
      Mehra.
10.   Report on Trend and Progress of Banking n India from 1993-2012.
11.   Risk management in Indian banks: some emerging issues Dr. Krishn A. Goyal, Int. Eco.
      J. Res., 2010 1(1) 102-109.
12.   Kasturi Nageshwara Rao, “The New Basel Accord”, ICFAI University Press,
      Hyderabad, 2004.
13.   Ayyappan and Ramachandran (2011). Credit Risk Determinants of Public and Private
      Sector Banks in India, European Journal of Economics, Issue 34, pp. 78-88.
14.   Aashish Kumar Lal., (2010). Risk Management of Various Banks in Public and Private
      Sector, Dissertation, Skyline Business School, June 19th 2010, pp. 33-35.
15.   www.indianbankers.com.
16.   www.rbiorg.in.
17.   www.worldbank.org.
18.   http://www.rbi.org.in, (different dates).
19.   http://www.economictimes.com.
                                              32
International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324
(Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME

20. http://www.banksofindia.com
21. R.Shenbagavalli, S.Senthilkumar and Dr.T.Ramachandran, “A Strategy to Manage the
    NPAs of Public Sector Banks”, International Journal of Management (IJM), Volume 4,
    Issue 3, 2013, pp. 1 - 7, ISSN Print: 0976-6502, ISSN Online: 0976-6510.
22. Dr.N.Kannan, “Risk and Technology Management in Banking Industry”, International
    Journal of Management (IJM), Volume 1, Issue 1, 2010, pp. 43 - 58, ISSN Print: 0976-
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23. Dr. C. Mahadeva Murthy and Prof. S.N. Pathi, “Risk Management in Banking: A Study
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    Management (IJM), Volume 4, Issue 4, 2013, pp. 119 - 130, ISSN Print: 0976-6502,
    ISSN Online: 0976-6510.




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