The capital position of Indian banks, comfortable today, faces significant challenges in the years ahead. Two major developments will shape their ability to absorb losses and influence their business strategies: the prospect of rising capital needs under Basel’s Pillar-II, as its contours become clearer to regulators worldwide, and the applicability of new accounting standards that require loan-loss provisions to be made through expected credit losses.First, the capital requirements. Under Basel’s Pillar-I, RBI currently requires Indian banks to maintain a minimum capital adequacy ratio of 9% of risk-weighted assets. The Pillar-I capital requirements are based on credit risk, operational risk, and market risk on the trading book. At the moment, the banking system as a whole produces more than adequate capital for this measure, at 14.8% CRAR as against the requirement of 11.5%, including the capital earmarked for the capital conservation buffer.
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