The IUP Journal of Applied Economics
Credit Risk: The Achilles? Heel of Higher Capital Under Basel Norms

Article Details
Pub. Date : April, 2020
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE20420
Author Name : Noor Ulain Rizvi, Smita Kashiramka, Shveta Singh
Availability : YES
Subject/Domain : Economics
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No. of Pages : 22

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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.


Description

In the aftermath of the Global Financial Crisis (GFC), concerns regarding the quality of balance sheet have resurfaced. The objective of this study is to answer a relevant query concerning the underlying aim of Basel norms, that is: Does an increase in Capital Adequacy Requirements (CAR) prompt banks to decrease risk or to assume increased risk? Exploring the impact of increased CAR on credit risk seems important as failing banks often witness increasing Non-Performing Assets (NPAs) in their portfolio; it is considered the primary factor behind systemic bank failures worldwide (Bardhan et al., 2019). The prevalence of NPAs is also noted to weaken the effectiveness of banks credit channels and threaten financial stability (Jassaud and Vidon, 2017).

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