Highly technical strong message - Dr.T.V.Gopalakrishnan

My View on Higher regulatory capital for banks - V.K.Sharma

The article is highly technical and carries a strong message that higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were. This is true provided the balance sheet is drawn strictly as per the regulatory prescriptions and accounting standards.Is this happening in India is a major question? Fudging and window dressing of balance sheets is an established practice in India and the ratios referred to in the article cannot be given a serious weightage as such. The NIM, ROA,Capital Adequacy Ratio etc are all to a great extend only showing indicative trends and not necessarily the correct position. The NPAs are grossly underestimated and the off balance sheet items which get converted into risky assets do not seem to be getting a realistic assessment. The regulatory capital ratio exceeds the requirement level by a wide margin cannot be taken as a correct and comfortable picture. The ratio of pure equity capital in relation to all risky assets is perhaps a better assessment as regulatory capital has some components which are manipulative in nature. If pure equity capital is taken as a yard stick,the Indian banks particularly Public Sector banks cannot be said to be showing a comfortable position as increase in pure capital ie equity capital may not be proportionate to the increase in risk weighted assets.