Credit risk: the Achilles’ heel of higher 3 capital under Basel norms

Abstract

The financial crisis of 2008-09 emphasized that banks succumb to rising pressure of Non-Performing Assets (NPAs), which affects their long-term sustainability and growth. Though India remained relatively unaffected by the crisis, the present state of NPAs in the country is rather alarming even after adhering to the Basel norms for decades. In the light of these concerns, this study investigates whether NPAs are an Achilles’ heel of adopting higher Capital Adequacy Requirements (CAR) of Basel norms, introduced to bring financial stability. Panel regression has been employed on a sample of 46 banks for the period 2005-2018, to include both Basel II and III regimes to draw better conclusions about the relationship. To delve deeper, a disaggregative analysis based on the ownership of banks and accounting for the effects of Global Financial Crisis (GFC) is carried out. The study reveals a positive relationship between the two, post crisis. However, the possible explanation for this relationship is different from the explanation usually stated for developed countries that observe a similar relation.