CAPITAL adequacy ratio—the minimum amount of capital banks have to set aside while lending—of Indian banks would continue to remain higher than the minimum regulatory requirement of 9% even if sticky loans, or NPAs, were to more than double. Addressing a seminar at the the London Business School on Thursday, RBI deputy governor Rakesh Mohan said that Indian banks were sound and healthy unlike their counterparts in the West.

This was established by the stress test of Indian banks conducted by a governmentappointed committee on financial sector assessment in view of the ongoing economic crisis. The committee studied data of the end-September ‘08 period, when the financial crisis shot into the limelight.     Stress tests are conducted from a bank’s financial data to study the ability of banks to withstand significant shocks arising from large potential changes in credit quality, interest rate and liquidity conditions.

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 “The committee’s stress test for credit, market and liquidity risks show that Indian banks are generally resilient,’’ Mr Mohan said. He added that in the worst-case scenario, even if gross non-performing assets of the banking sector were to increase by 150%, overall capital adequacy ratio would have declined to 10.6% in September 2008 -well-above the prescribed 9% limit.

Even a recent study by ratings agency Crisil noted that while bank NPAs would rise in light of the slowdown, yet, given their healthy capitalisation and cleaner balance sheets, the impact of rising delinquencies was likely to be within the stress tolerance levels.

In India, according to Mr Mohan, the main fallout of the crisis was a sell-off by foreign institutional investors in domestic equity markets, leading to a sharp reduction in net capital inflows, which were also affected by slowing external demand. As a result of this, there were pressures in the foreign exchange market because of which the central bank had to sell dollars. Mr Mohan in his analysis of the impact of the crisis pointed that, “While foreign exchange sales attenuated the mismatch in the foreign exchange market, these operations drained liquidity from the rupee market and accentuated pressures on the rupee liquidity. ’’

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