Recommend    |    Subscriber Services    |    Feedback    |     Subscribe Online
 
 
 
 
IUP Publications Online
Home About IUP Magazines Journals Books Archives
     
 
The IUP Journal of Financial Risk Management
Risk Weighted Assets Density as a Parameter of Risk Profile of Bank Assets: A Study of Indian Banks
:
:
:
:
:
:
:
:
:
 
 
 
 
 
 
 
 

Capital Adequacy Ratio (CAR) signifies the proportion of capital funds of banks in relation to Risk Weighted Assets (RWAs). Bank assets carry risk of delinquency depending upon the nature and volume of assets. Any loss arising from failure of assets has to be borne by capital funds. The capital must, therefore, bear prescribed ratio in relation to risk assessed assets in order to meet regulatory norms. RWAs constitute the risk profile of bank’s assets portfolio. The ratio of RWAs to total asset exposure provides a measure of riskiness of assets. The ratio has come to be known as RWA density and its variance from year to year indicates change in risk profile of asset portfolio of the bank. An increase in RWA density over a period shows that overall risk profile of bank assets has deteriorated. This may arise due to asset with higher risk weight substituting lower risk assets, without any change in risk weight factors. Similarly, a decrease in RWA density of bank would indicate that risk quality of assets has improved. The paper examines the variations in risk profile of bank assets using the parameter of RWA density, both for public and private sector banks in India.

 
 
 

Capital in banks plays an important function in absorption of unanticipated losses. Generally, banks are expected to absorb the losses from the normal earnings. But there may be some unanticipated losses which cannot be absorbed by normal earnings. Capital comes in handy in such abnormal loss situations to cushion off the losses. In this way, capital plays the role of an insurance. Adequate capital in banking is a confidence booster (Asikhia and Sokefun, 2013). The Basel concept of capital adequacy for banks was introduced in India by the Reserve Bank of India (RBI) in line with recommendations of Basel Committee on Banking Supervision (BCBS). The concept deals with minimum capital requirement for banks in proportion to their Risk Weighted Assets (RWAs) such that the capital should be able to meet losses. The capital norms, including their components, have undergone changes from time to time, based on experience gained and developments in financial markets all over the world. The first Basel guidelines, known as Basel I, were introduced in 1992 and were upgraded in terms of both capital quantity and quality in next two versions, Basel II and Basel III. While Basel II came in 1998, the latest version, Basel III that resulted as an after shoot of financial crisis in 2008-09, evolved in 2013 to be implemented in a phased manner by March 2019.

 
 
 

Financial Risk Management Journal, Capital Adequacy Ratio (CAR) signifies, Risk Weighted Assets (RWAs).