Allaying fears fuelled by the falling market capitalisaiton (M-Cap) of banks, Chief Economic Adviser KV Subramanian on Sunday asserted that the lending institutions are more-than-adequately capitalised and their deposits well taken care of.

Even as he claimed that State Bank of India is as safe as any other bank in the world, Subramanian questioned the reliance on the deposits-to-market-capitalisation (M-Cap) ratio and dubbed the ratio an incorrect metric to assess a bank’s safety.

M-Cap refers to total value of shares available for buying-selling on stock exchange and it is calculated on the basis of prices on the exchange at any given point of time. It is very dynamic and changes with the change in prices during the trading period (9.15 am to 3.30 pm) of the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Since the stock market has been falling in the last few days, the M-Cap of many stocks including that of public and private sector banks has come down. This has led to a fear that the strength of banks has come down.

Commenting on the ratio, Subramanian said no banking sector expert or banking regulator uses this measure. “Banking sector experts and regulators use what is called the CRAR or the capital to risk weight weighted assets ratio,” he said. CRAR is sometime also referred to as CAR (capital adequacy ratio). It is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities. It is decided by central banks and bank regulators in various countries (the Reserve Bank of India in India’s case) to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

He made it clear that the M- Cap ratio does not really capture the safety of a bank, because it is affected by market capitalisation. The stock price of a bank can change minute to minute. As a result, the M-cap ratio will also change minute to minute, but solvency cannot actually change minute to minute. Market capitalisation in itself is affected by things like prospective growth of a bank, the net interest margin and the efficiency of the banking operations, none of which have anything to do with the safety of the bank and this affects the future earnings. Considering all these, he reiterated that the M-Cap ratio should not be a parameter for assessing the strength of bank.

Ample cushion

The Basel III norms stipulated a capital to risk weighted assets of 8 per cent. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CRAR of 9 per cent, while Indian public sector banks are mandated to maintain a CAR of 12 per cent.

According to Subramanian, it is important to keep in mind that the international norm for CRAR is 8 per cent and Indian banks have an average CRAR of 14.3 per cent. “Now, 14.3 versus 8 per cent actually translates into almost 80 per cent greater capital than the international norm; even compared to what the Reserve Bank of India requires i.e. 9 per cent CRR, our banks have 60 per cent more capital,” he explained.

“Our banks are well capitalised and deposits, with enhancement of the deposit insurance cover to ₹5 lakh, are well taken care of. There is absolutely no reason for anyone to worry,” he said.

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