MUMBAI: The Indian banking system is sound in terms of RBI’s prudential guidelines. But a comparison with major economies reveals that Indian banks are in the lower half when it comes to capital adequacy and non-performing assets (NPAs).
Last week, RBI governor Shaktikanta Das asked banks to raise capital to meet growth requirements. Against this backdrop, the research department of Bank of Baroda (BoB) has compared the soundness of Indian banks with those in major economies.
In terms of capital adequacy, India’s 15.3% average for the banking system is lower than 22 of the 26 countries in the study, with only Greece, China and Russia having lower capital adequacy. Most emerging markets — including Argentina, Indonesia, Thailand, Malaysia, Korea, Spain, Brazil, South Africa and the Philippines — have higher capital to risk-weighted assets ratio.
In terms of the ratio of NPAs to total assets, India is close to the bottom, with only Russia and Greece having higher NPAs at 7% and 9.2%, respectively. Of the 26 countries, 22 have NPAs below 4% as against 5.8% for India, according to the report authored by BoB economist Sonal Badhan.
India fares better than most in terms of provisions to NPA ratio. With provision coverage of 74%, India is better than 19 others. In terms of return on assets and return on equity, India is close to the middle.
The BoB report is based on IMF’s data, which may differ from Indian banking data as the definitions have been homogenised across countries. Analysts say higher levels of bad loans increase the cost of funds for other borrowers as banks have to price the credit cost into their loans. A lower capital base reduces their ability to raise cheap funds as this would lower their credit rating.
