Capital adequacy ratio to rise 44bps 

Capital adequacy ratio to rise 44bps 

Context:

• Capital adequacy ratio will go up by 44 bps.

Introduction:

• The state-run banks that will receive capital from the government will use it to meet provisioning requirement for accounts that facing bankruptcy proceedings.
• This was mandated by the banking regulator, State Bank of India (SBI)- the country’s largest lender.
• SBI will receive ₹8,800 crore capital from the government this financial year out of ₹88,139 crore allocated to 20 banks.
• SBI’s capital adequacy ratio was 13.56% as on 30 September, 2017.

What was the main objective of this capital infusion?

• The purpose of funding credit growth is to secure capital for next financial year. This will help in taking care of further growth capital requirement.
• This capital is not for regulatory purpose but for growth.

What will be the impact on capital adequacy post this fund infusion?

• The impact on capital adequacy ratio is about 44 bps points.

Capital adequacy ratio:

• Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk.
• It is a measure of a bank’s capital.
• It is expressed as a percentage of a bank’s risk weighted credit exposures
• This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world.
• Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
• 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.