Unlike their global counterparts in countries like the US, Indian banks are relatively rock-solid. According to the Committee on Financial Sector Assessment headed by RBI Deputy Governor Rakesh Mohan, a 150 per cent hike in NPA levels, for instance, would make the capital adequacy fall by just 2.4 percentage points — at 10.6 per cent, this would still be higher than the mandated 9 per cent. Just 12 banks would find their capital adequacy falling below this level. But what if there’s a sudden interest rate shock?
The Committee measures this through a measure called the ‘Duration of Equity’ (DoE). DoE is essentially the net present value of assets divided by the net present value of liabilities of banks — a lower DoE means the banks are less vulnerable to an interest-rate change. The good news is that the DoE has been declining consistently, showing Indian banks are getting less vulnerable to interest rate shocks. Based on the current DoE level of 8.1, the RBI says that a sudden change of interest rates of 2.4 percentage points would wipe out a fifth of the assets of banks. This, the RBI says, has never happened before, but if it does, the capital adequacy of 29 banks which account for more than a third of the total assets in the banking sector would fall below the minimum required level of 9 per cent.
