Indian Banks' Association (IBA) has formed a study group of economists to look into the capital adequacy issues in the domestic banking sector. The study group is expected submit its report in couple of months. "Strategies to strengthen the capital base of Indian banks may need to incorporate a multi-dimensional approach," the IBA says.
IBA pointed out the need of government budgetary support to weak banks. "In the absence of adequate capital, their ability to continue would be difficult," the association said. A host of old private sector banks though have taken the path of tie-up with the foreign banks, the path may not be viable for the smaller ones. IBA views, "it is important the capitalisation of old private sector banks is examined in detail since this segment has good prospect for further development."
The banking industry, since the liberalisation of the FDI options, have been trying to access the foreign funds. However, IBA cautioned, "Though banks in India can further explore this option, there is keen competition emerging from the Asian banking systems, which are on the recovery path from the serious currency and financial crises they experienced in the late 1990s."
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IBA has emphasised that at the industry level, effort should be made for exploring liasons useful for Indian banking. The association pointed out, "It is not necessary that Indian banking should always be viewed as a recipient of outside help. There is good possibility for Indian banks which are positioned well, to play an important role in the transitional central Europe and Asia where the banking system is still in infancy."
As per the prudential norms, the banks are required to maintain a 9 per cent capital adequacy ratio (CAR). As on March 2000, the average capital adequacy ratio of the Indian banking industry however were at 19.63, well above the stipulated level. The ratio, however, was lower than 19.67 as on March 1999. Though the average CAR was much more than the stipulated level, Crisil in an earlier study termed the capital adequacy of the banking industry only as 'moderate'.