Category Archives: Indian banking sector

Bank Deposits Held with Indian Scheduled Commercial Banks (SCBs)


Bank Deposits Held with Indian Scheduled Commercial Banks (SCBs)

Bank Deposits Held with Indian Scheduled Commercial Banks (SCBs)

Bank Deposits held with Indian Scheduled Commercial Banks as on 21st March 2014 stood at Rs. 77,393.9 Billion i.e. Rs. 77,39,390 Cr with an Increase of Rs. 47,080 Cr (0.61%) Week on Week.

The Aggregate Deposits represent Demand and Time Liabilities of a bank (excluding inter-bank deposits). It is released fortnightly by Reserve Bank of India.


Next release will be on 18th April 2014.


Bank Credit Held with Indian Scheduled Commercial Banks (SCBs)

Bank Credit Held with Indian Scheduled Commercial Banks (SCBs)

Bank Credit Held with Indian Scheduled Commercial Banks (SCBs)

Bank Credits held with Indian Scheduled Commercial Banks (SCBs) as on 21st March 2014 stood at Rs. 60130.90 Billion i.e. Rs. 60,13,090 Cr with an Increase of Rs. 75,840 Cr (1.28%) Week on Week.

Bank credit in India is the total of three items viz. (A) Loans, cash-credits and overdrafts, (B)
Inland bills – purchased and discounted and (C) Foreign bills – purchased and discounted. Bills (inland and foreign) rediscounted with the RBI, IDBI.
It is released fortnightly by Reserve Bank of India.

Next release will be on 18th April 2014.


Third Quarter Review of Monetary Policy 2013-14 Released by Reserve Bank of India on 28th February 2014.

Third Quarter Review of Monetary Policy 2013-14 Released by Reserve Bank of India  on 28th February 2014.

Third Quarter Review of Monetary Policy 2013-14 Released by Reserve Bank of India on 28th February 2014.

RBI hiked 25 basis points in Repo rate to 8% and MSF and Bank rate to 9%.
CRR remains unchanged at 4%.
Reverse Repo rate changes to 7%.

For detailed reviews on Monetary Policies by RBI visit:

What is Basel III Accord and Its Requirements and Impacts on Indian banking sector?

Basel III or Basel 3 released in December, 2010  is the third in the series of Basel Accords.  These accords deal with risk management aspects for the banking sector.   In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision)  on bank capital adequacy, stress testing and market liquidity risk.  (Basel I and Basel II are the earlier versions of the same, and were less stringent)

Basel III Accord and Its Requirements and Impacts on Indian banking sector

What does Basel III is all About?

According to Basel Committee on Banking Supervision “Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector”.

Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II.   This latest Accord now seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency.

What are the objectives / aims of the Basel III  measures?

Basel 3 measures aim to:

  • Improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
  • Improve risk management and governance
  • Strengthen banks’ transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI.  It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020 (The estimates vary from organisation to organisation).   Expansion of capital to this extent will affect the returns on the equity of these banks specially public sector banks.  However, only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum.

What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel iii Accord ?

Basel III: Three Pillars Still Standing :  

Any one who has ever heard about Basel I and II,  is most likely must have heard about Three Pillars of Basel.   Three Pillar of Basel still stand under Basel 3.

Basel III has essentially  been designed to address the weaknesses that become too obvious during the 2008 financial crisis world faced.   The intent  of the Basel Committee seems to prepare the banking industry for any future economic downturns.. The framework enhances bank-specific measures and includes macro-prudential regulations to help create a more stable banking sector.

The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas.

Pillar 2 :  Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face.

Pillar 3: Market Discipline :   Increasing the disclosures that banks must provide to increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and Basel II?

What are the Major Features of Basel III ?

(a) Better Capital Quality :   One of the key elements of Basel 3 is the introduction of  much stricter definition of capital.  Better quality capital means the higher loss-absorbing capacity.   This in turn  will mean that banks will be stronger, allowing them to better withstand periods ofstress.

(b) Capital Conservation Buffer:    Another key feature of Basel iii is that now banks will be required to hold a capital conservation buffer of 2.5%.  The aim of  asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.

(c) Countercyclical Buffer:   This is also one of the key elements of Basel III.   The countercyclical buffer has been introducted with the objective to increase capital requirements in good times and decrease the same  in bad times.  The buffer will slow banking activity when it overheats and will encourage lending when times are tough i.e. in bad times.  The buffer will range from 0% to 2.5%, consisting of common equity or other fully loss-absorbing capital.

(d) Minimum Common Equity and Tier 1 Capital Requirements :   The minimum requirement for common equity, the highest form of loss-absorbing capital, has been raised under Basel III from  2% to 4.5% of total risk-weighted assets.  The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current minimum of 4% to 6%.   Although the minimum total capital requirement will remain at the current 8% level, yet the required total capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio:     A review of the financial crisis of 2008 has indicted  that the value of many assets fell quicker than assumed from historical experience.   Thus, now Basel III rules include a leverage ratio to serve as a safety net.  A leverage ratio is the relative amount of capital to total assets (not risk-weighted).   This aims to put a cap on swelling of leverage in the banking sector on a global basis.   3%  leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios:  Under Basel III, a framework for liquidity risk management will be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential framework, systemically important banks will be expected to have loss-absorbing capability beyond the Basel III requirements. Options for implementation include capital surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III :


Under Basel II

Under Basel III

Minimum Ratio of Total Capital To RWAs



Minimum Ratio of Common Equity to RWAs


4.50% to 7.00%

Tier I capital to RWAs



Core Tier I capital to RWAs



Capital Conservation Buffers to RWAs



Leverage Ratio



Countercyclical Buffer


0% to 2.50%

Minimum Liquidity Coverage Ratio


TBD (2015)

Minimum Net Stable Funding Ratio


TBD (2018)

Systemically important Financial Institutions Charge


TBD (2011)

Analyzing banking sector shares

What is a bank?

A bank is essentially a financial institution that acts as an intermediary between those who need money and those who have an excess of it. Banks accept deposits from companies and the general public and make loans to companies and individuals who need money. Banks offer interest on the deposits made with it and charge interest on the loans lent out. The rate of interest offered on deposits is less than the interest charged on loans lent out. The difference between these interests is the main source of income for a bank. Apart from depositors’ money, a bank has access to other sources of funds like borrowing from the RBI (Reserve Bank of India), from corporate bodies and from foreign sources.

Analyzing banking sector shares in India

Analyzing banking sector shares in India

RBI (Reserve Bank of India)

The Reserve Bank of India (RBI) is a government body that oversees the banking system in India and is in charge of regulating the affairs of the banks.

The banking sector in India

Banking is probably the most important sector in any country. A country cannot grow without a healthy and robust banking sector. Loans (credit) are the lifeblood of any economy. Companies need loans to take up new projects, to bridge short term liquidity gaps and for working capital. People need loans to buy houses, cars, educate their children and a myriad of other things. Some of the best paid executives in the world are bankers.

The banking sector in India is well regulated by the RBI and is considered to be fairly conservative compared to its global peers. India has 2 categories of banks – Public sector banks and Private sector banks. It is possible to invest in the shares of both private sector and public sector banks as most of the major banks’ shares trade on the BSE and NSE.

Types of banks

Public sector banks (e.g. SBI, Andhra Bank) are owned at least partially by the Government of India. They tend to be conservative and have higher needs for documentation and collateral for making loans. Some people have the opinion that they are more slow and bureaucratic in their style of functioning and are more difficult for individuals to do business with.

Private banks are purely privately owned. They tend to be more aggressive and give out loans a little more easily than public sector banks. Some people feel that private sector banks are more focussed on sales than public sector banks and tend to close deals faster.

Factors that affect bank shares

As always, the key factors to consider while evaluating any company’s shares are growth potential, profitability and quality of management. The following factors tend to influence the growth and profitability of banks. The operations and share prices of all banks are influenced by these factors.

1. Interest Rates

( In general, the lower the interest rates, the better for the bank’s share price)

in credit uptake. The inability of a bank to deploy loans in turn effect its

Definition: The bank rate is the rate at which RBI lends funds to commercial banks.

Source: RBI website


When the RBI increases the Bank Rate, the rate at which banks borrow funds increases. An increase in bank rate is usually accompanied by a simultaneous increase in deposit rates (to encourage customers to deposit more cash as deposits are a cheaper source of funds than borrowing) and lending rates (The increase cost of borrowing is passed onto debtors of the bank).

One should be careful when the prevailing bank rates are high because an increase in bank rate beyond a certain point can have negative effects like:

A. Higher NPAs:

When a customer defaults on a loan (interest is outstanding for more than 90 days), the bank writes off the loans from its books and the loan is termed as a Non-Performing Asset (NPA). An increase in the bank rate leads to an increase in interest borne by the borrower which in turn can lead to an increase in loan defaults.

B. Credit Crunch:

At high interest rates, banks might find it tough to borrow which can lead to a credit crunch (reduction in availability of loans) and in turn hurt general lending operations of the bank.

C. Decrease in credit uptake:

The increased rates discourage borrowers from taking fresh loans, thus leading to a decrease profitability as interest on loans is a major source of income for a bank.

2. Net Interest Margin

(The higher the Net Interest Margin of a bank, the better for its share price)


Net interest margin is the percentage difference between income generated from loans made by the bank and the interest paid on loans taken by the bank. It is expressed as a percentage of what the financial institution earns on loans and other assets in a time period minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets).

Source: Footnotes of company financials and conference calls.


Net interest margin (NIM) is an indicator of the ability of a bank to generate returns. Higher the NIM, the more profit a bank can earn from a given pool of funds. There is no benchmark number which is considered as an ideal level to maintain. While assessing NIM, an investor should do a relative comparison of NIMs of different banks to get an idea of how good or bad a given bank is performing.

3. Provisions and Non-Performing Assets (NPA)

(The lower NPAs for a bank, the better for its share price)


When a bank does not expect a customer to repay the loan, it sets aside a certain sum of money for the expected loss. This is known as a provision. When a customer defaults on a loan (interest is outstanding or more than 90 days), the bank writes it off from its books and the loan is termed as a Non-Performing Asset (NPA).There are 2 forms of NPAs:-

Gross NPA:

The amount outstanding against the borrowers account (with the outstanding interest)

Net NPA:

Gross NPA – Provisions made on the loan – Recoveries made on the loan – other adjustments


Profit and Loss statement


Provisions and NPAs are a reflection of the healthiness of a bank’s loan portfolio book. Higher ratio reflects rising bad quality of loans. Generally private banks have higher ratio of provisions and NPAs as compared to public banks because

  1. Private banks are known be more aggressive than public banks while dispersing loans
  2. Private banks charge a higher rate of interest as compared to public banks. Thus, the chances of interest/ loan defaults are higher.

Hence it would be a good idea to avoid comparing public banks versus private banks. Also amongst the two NPAs- Gross NPA vs Net NPA, give more weightage to Gross NPAs.

4. Capital Adequacy Ratio (CAR) )

(The higher the CAR of a bank, the better for the its shareprice)


Capital adequacy ratios are a measure of the amount of a bank’s capital expressed as a percentage of its risky loans. It is a measure of how well capitalized a bank is, i.e. how easily it can withstand losses. Applying minimum capital adequacy ratios serves to protect depositors and improve the stability and efficiency of the financial system. The RBI specifies the minimum capital adequacy ratios that all banks have to maintain. As investors, we have to expect more than just the minimum.

There are 2 types of CAR:

Tier-I Capital Ratio: The level at which a bank can absorb losses without being required to cease trading.

Tier-II Capital Ratio: The level at which a bank can absorb losses in the event of a winding-up. It provides a lesser degree of protection to depositors, e.g. subordinated debt.


Profit and Loss statement


The higher the CAR, the safer are the depositors’ funds. Considering that banks have been expanding their operations very aggressively, it is important to keep an eye out for whether they are adequately capitalized. A bank which maintains its CAR a few percentage points above the prescribed level is considered safe.

5. CASA Ratio

(The higher the CASA ratio of a bank, the better for its share price)


This is the ratio of current account and savings account deposits to the total deposit base of the bank.


Footnotes of company financials and conference calls.


The bank pays out much lower interest rates on savings accounts and current accounts than other types of deposits such as fixed deposits. Raising money this way is also cheaper than loans from other sources like RBI, money market or other banks. Hence for a given sum of money, higher the ratio more profitable is the bank.

6. Number of branches

(The more branches a bank has, the bigger and better it is)

The greater the number of branches, the better connected the bank is to its customers. This gives it a:

  1. Better ability to generate funds via deposits.
  2. Better ability to disperse loans.


India banks: Annual Report analysis Source: IRIS (13-JUN-13)

Nomura Financial Advisory and Securities has analyzed annual reports of ICICI Bank, HDFC Bank, IndusInd Bank, Yes Bank, Bank of Baroda and Punjab National Bank for relative movement in non-performing loan buckets and trends in excess ‘specific’ provisions on the books, ALM gaps, loans and deposit movements in various maturity buckets, trends in priority sector lending, working capital loans and contingent liability trends. Following are the key highlight from Nomura’s analysis:

> Private sector banks have a gdreater proportion of GNPL in the doubtful/loss buckets compared with PSU banks. Bank of Baroda has seen a sharp increase in the proportion of its sub-standard assets in FY12- the percentage of sub-standard loans within the GNPL book increasing from 34.8% in FY11 to 59.6% in FY12. In FY13, there has not been much ageing of this sub-standard loan book with the proportion increasing marginally to 61.6%. Within private sector banks, ICICI Bank had a relatively better ‘aged’ GNPL book as in FY13.

> In terms of excess ‘specific’ provisions carried on the balance sheet, Yes Bank leads the pack with excess ‘specific’ provisions of 55% over what is required under IRAC norms while PSU banks like Bank of Baroda (BoB) and Punjab National Bank (PNB) have low ”excess specific provisions” of 11.9% and 3.9%, respectively.

> It also looks at what proportion of sub-standard and doubtful assets (D-1 and D-2 categories) have been covered by provisions. The rationale behind this analysis is – since D-3 and loss categories should carry a mandated 100% provision, it analyzes how much provision cover is left for sub-standard and D-1 & D-2 assets. No surprises here – private banks have high provision cover (ranging from ICICI Bank at 57.5% to Yes Bank at 91.8%) while BoB and PNB have 43.9% and 38.2% coverage, respectively.

> Asset-liability management: ICICI Bank has seen a sharp improvement in its deposit structure in FY13 due to growth in core CASA and retail term deposits. Deposits in 3-5 year and 5 years and beyond maturity buckets have registered a growth of 163% and 47%, respectively. This improvement in deposit structure enabled ICICI Bank to reduce its ALM gap from 3 months in FY12 to a negative 1 month in FY13. This should ensure margin stability for the bank in the year ahead, in its view.

> On priority sector lending mandate: Only HDFC Bank and IIB have managed to meet their priority sector loan mandates solely through their loan books, while it sees the biggest shortfall for Yes Bank due to the sharp increase in its loan book in FY11 and also the regulatory changes around securitization through the assignment route impacting pool buyouts.

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.


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