Introduction to Capital Adequacy Norms
Along alongside profitability together with safety, blogspot.com//search?q=what-is-bank-introduction-definition">banks likewise plow over importance to Solvency. Solvency refers to the province of affairs where assets are equal to or to a greater extent than than liabilities. H5N1 banking firm should select its assets inwards such a way that the shareholders together with depositors' involvement are protected.
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1. Prudential Norms
The norms which are to last followed piece investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders together with depositors. Prudential Norms are mostly prescribed together with implemented past times the fundamental banking firm of the country. blogspot.com//search?q=what-is-bank-introduction-definition">Commercial Banks receive got to follow these norms to protect the interests of the customers.
For international banks, prudential norms were prescribed past times the Bank for International Settlements popularly known every bit BIS. The BIS appointed a Basle Committee on Banking Supervision inwards 1988.
2. Basel Committee
Basel commission appointed past times BIS formulated rules together with regulation for effective supervision of the fundamental banks. For this it, likewise prescribed international norms to last followed past times the fundamental banks. This commission prescribed Capital Adequacy Norms inwards lodge to protect the interests of the customers.
3. definition of Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) is defined every bit the ratio of bank's uppercase to its run a hazard assets. Capital Adequacy Ratio (CAR) is likewise known every bit Capital to Risk (Weighted) Assets Ratio (CRAR).
India together with Capital Adequacy Norms
The Government of Republic of Republic of India (GOI) appointed the blogspot.com//search?q=what-is-bank-introduction-definition">Narasimham Committee inwards 1991 to advise reforms inwards the fiscal sector. In the twelvemonth 1992-93 the Narasimhan Committee submitted its rootage written report together with recommended that all the banks are required to receive got a minimum uppercase of 8% to the run a hazard weighted assets of the banks. The ratio is known every bit Capital to Risk Assets Ratio (CRAR). All the 27 Public Sector Banks inwards Republic of Republic of India (except UCO together with Indian Bank) had achieved the Capital Adequacy Norm of 8% past times March 1997.
The Second Report of Narasimham Committee was submitted inwards the twelvemonth 1998-99. It recommended that the CRAR to last raised to 10% inwards a phased manner. It recommended an intermediate minimum target of 9% to last achieved past times the twelvemonth 2000 together with 10% past times 2002.
Concepts of Capital Adequacy Norms
Capital Adequacy Norms included dissimilar Concepts, explained every bit follows :-
1. Tier-I Capital
Capital which is rootage readily available to protect the unexpected losses is called every bit Tier-I Capital. It is likewise termed every bit Core Capital.
Tier-I Capital consists of :-
- Paid-Up Capital.
- Statutory Reserves.
- Other Disclosed Free Reserves : Reserves which are non kept side for coming together whatever specific liability.
- Capital Reserves : Surplus generated from sale of Capital Assets.
2. Tier-II Capital
Capital which is instant readily available to protect the unexpected losses is called every bit Tier-II Capital.
Tier-II Capital consists of :-
- Undisclosed Reserves together with Paid-Up Capital Perpetual Preference Shares.
- Revaluation Reserves (at discount of 55%).
- Hybrid (Debt / Equity) Capital.
- Subordinated Debt.
- General Provisions together with Loss Reserves.
There is an of import status that Tier II Capital cannot overstep 50% of Tier-I Capital for arriving at the prescribed Capital Adequacy Ratio.
3. Risk Weighted Assets
Capital Adequacy Ratio is calculated based on the assets of the bank. The values of bank's assets are non taken according to the mass value exactly according to the run a hazard subdivision involved. The value of each property is assigned alongside a run a hazard subdivision inwards percent terms.
Suppose CRAR at 10% on Rs. 150 crores is to last maintained. This agency the banking firm is expected to receive got a minimum uppercase of Rs. fifteen crores which consists of Tier I together with Tier II Capital items discipline to a status that Tier II value does non overstep 50% of Tier I Capital. Suppose the amount value of items nether Tier I Capital is Rs. v crores together with amount value of items nether Tier II uppercase is Rs. 10 crores, the banking firm volition non receive got requisite CRAR of Rs. fifteen Crores. This is because a maximum of exclusively Rs. 2.5 Crores nether Tier II volition last eligible for computation.
4. Subordinated Debt
These are bonds issued past times banks for raising Tier II Capital.
They are every bit follows :-
- They should last fully paid upwardly instruments.
- They should last unsecured debt.
- They should last subordinated to the claims of other creditors. This agency that the bank's holder's claims for their coin volition last paid at terminal inwards lodge of preference every bit compared alongside the claims of other creditors of the bank.
- The bonds should non last redeemable at the pick of the holders. This agency the repayment of bond value volition last decided exclusively past times the issuing bank.
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