Capital Adequacy Norms

Basle capital accord of July 1988 recommended capital adequacy among banks. It is a cushion against unforeseen losses.

Narsimaham committee recommended the adoption of the bank of international settlement (BIS) norm on capital adequacy for banks. Which has been accepted by RBI and all banks in India and all branches of foreign banks in India are required to achieve the international norm of 8%. The adoption was introduced in phased manner from April 1992 covering all banks by 1996. The rate has been increased to 9% by the end of March 2000.

The capital adequacy ratio is the comparison between bank’s net worth with risk weighted assets which appear on the asset side of the balance sheet. Capital is divided into tier 1 and tier 2 capitals

Tier 1 capital is the core capital and provides permanent support to the bank against unexpected losses. It includes paid up capital, statutory reserves, and other disclosed free reserves.

Tier 2 capital or supplementary capital is less permanent or less readily available. It includes undisclosed reserves, cumulative perpetual preference shares.

 Required capital of 8%= present capital (tier 1 & tier 2) / aggregate risk weighed assets

 Thus the above discussed are capital adequacy norms by Indian banks.

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