The IUP Journal of Bank Management
Do Banks with High Capital Adequacy Perform Better? Evidence from Scheduled Urban Cooperative Banks in India

Article Details
Pub. Date : Nov, 2020
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJIT21120
Author Name :Ashish Srivastava and Nitu Saxena
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 19

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Abstract

Built-in jeopardy in the operations of banks due to their fiduciary responsibility, high leverage, and liquidity gaps necessitates that their financial position and performance remain stable and healthy. The regulatory nudge towards capital adequacy for banks has been intended to make them financially sound. While academic research on the relationship between capital adequacy and financial performance of banks remains inconclusive, this paper reexamines the subject from the angle of intra-group differences in the financial performance of banks in relation to their level of capital adequacy. The study finds that the scheduled Urban Cooperative Banks (UCBs) in India with poor capital adequacy, or with capital ratios slightly above the regulatory minimum, do not exhibit better performance in any of the select financial parameters than their other counterparts, and show inferior performance against certain parameters. However, banks with very high capital ratios operate with higher margins but fail to efficiently leverage their capital funds. This study indicates that an optimum level of capital adequacy of around 15% is best suited, along with an equity multiplier of 15. This may help the scheduled UCBs to improve their return on equity, and strengthen their financial soundness and performance.


Description

Primary Urban Cooperative Banks (UCBs) in India are registered as cooperative societies under the provisions of either the respective State Cooperative Societies Act(s) of the state concerned or the Multi-State Cooperative Societies Act, 2002. These are essentially cooperative societies, licensed by the Reserve Bank of India (RBI), for conducting banking business. Out of the 1,500 plus UCBs operating across India, 54 UCBs are recognized as scheduled banks by placing their names in the second schedule of the Reserve Bank of India Act, 1934. These scheduled UCBs control a significant portion of the business of the UCB sector.

This paper evaluates the relationship of capital adequacy of scheduled UCBs with their financial performance and attempts to investigate if the banks with high capital adequacy


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