A study on the impact of capital adequacy ratio on profitability, return ratios and asset quality for the selected banks in India
By: Patel, Kalpeshkumar and Kanchan, Prateek
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Material type: 
BookPublisher: Indian Institute of Foreign Trade Description: 26(2), Apr-Jun, 2024: p.48-63.Subject(s): Capital Adequacy Ratio (CAR), Profitability, Return Ratios, Asset Quality, Indian Banks, Basel Norms, Risk Management, Financial Stability, Banking Sector, Basel norms and capital adequacy, Return ratios, Profitability ratios, Net NPA
In:
Indian Institute of Foreign TradeSummary: This article examines the impact of capital adequacy ratio (CAR) on profitability, return ratios, and asset quality in selected Indian banks. Capital adequacy, mandated under Basel norms, serves as a critical measure of a bank’s financial strength and resilience against credit and market risks. The study analyzes how variations in CAR influence key performance indicators such as return on assets (ROA), return on equity (ROE), and non-performing assets (NPAs). Findings suggest that while higher CAR enhances stability and investor confidence, it may also constrain profitability by limiting leverage. Conversely, inadequate capital buffers increase vulnerability to asset quality deterioration and systemic risk. By situating the analysis within the Indian banking sector, the paper underscores the delicate balance between regulatory compliance, profitability, and sustainable growth. The study contributes to ongoing debates on financial regulation, risk management, and the evolving role of capital adequacy in ensuring banking sector resilience. Among several global agreements, Basel Norms are prominent for promoting financial stability, improving risk management practices, and enhancing the resilience of the global banking ecosystem. They provide a framework for banks and regulators to assess and address various risks for a more resilient banking environment. For banks in India and globally, adhering to the Capital Adequacy Ratio (CAR) is one of the mainstays of Basel norms. This study focused on the impact of CAR on the return ratios, profitability ratios, and asset quality of the leading 12 banks in India. A simple linear regression was used. The findings indicated that CAR impacted return on equity, operating profit margin, and net profit margin. The findings of the study have implications for banks and regulators for enhancing financial performance and ensuring banking sector stability, respectively. – Reproduced
https://publication.iift.ac.in/Articles/266.pdf
| Item type | Current location | Call number | Vol info | Status | Date due | Barcode |
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Articles
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Indian Institute of Public Administration | 26(2), Apr-Jun, 2024: p.48-63 | Available | AR133645 |
This article examines the impact of capital adequacy ratio (CAR) on profitability, return ratios, and asset quality in selected Indian banks. Capital adequacy, mandated under Basel norms, serves as a critical measure of a bank’s financial strength and resilience against credit and market risks. The study analyzes how variations in CAR influence key performance indicators such as return on assets (ROA), return on equity (ROE), and non-performing assets (NPAs). Findings suggest that while higher CAR enhances stability and investor confidence, it may also constrain profitability by limiting leverage. Conversely, inadequate capital buffers increase vulnerability to asset quality deterioration and systemic risk. By situating the analysis within the Indian banking sector, the paper underscores the delicate balance between regulatory compliance, profitability, and sustainable growth. The study contributes to ongoing debates on financial regulation, risk management, and the evolving role of capital adequacy in ensuring banking sector resilience. Among several global agreements, Basel Norms are prominent for promoting financial stability, improving risk management practices, and enhancing the resilience of the global banking ecosystem. They provide a framework for banks and regulators to assess and address various risks for a more resilient banking environment. For banks in India and globally, adhering to the Capital Adequacy Ratio (CAR) is one of the mainstays of Basel norms. This study focused on the impact of CAR on the return ratios, profitability ratios, and asset quality of the leading 12 banks in India. A simple linear regression was used. The findings indicated that CAR impacted return on equity, operating profit margin, and net profit margin. The findings of the study have implications for banks and regulators for enhancing financial performance and ensuring banking sector stability, respectively. – Reproduced
https://publication.iift.ac.in/Articles/266.pdf
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