Chief Economic Advisor said thehe margin of safety for our banks is huge
Chief Economic Advisor (CEA) KV Subramanian on Sunday said the amount of deposits that are insured has been raised to Rs 5 lakh which covers a significant majority of the deposits, hence depositors need not be worried.
"Our banks are really well-capitalised. The amount of deposits that are insured has been raised to Rs 5 lakh which covers a significant majority of the deposits. Investors should also be not worried as the Indian banking system has significant capital," Mr Subramanian told ANI.
The Chief Economic Advisor also said that the m-cap ratio is an incorrect way to measure the safety and solvency of a bank. He further added that Capital to Risk (Weighted) Assets Ratio (CRAR) is the standard measure for the safety of a bank. Pointing out figures, the CEA said that Indian banks have 80 per cent more capital than the globally mandated norm for CRAR.
"The m-cap ratio is a totally incorrect measure to assess the safety or solvency of a bank. Instead, what experts and regulators worldwide use is CRAR. The global norm for CRAR is 8 per cent. Compared to that, our banks have on average 14.3 per cent CRAR. This means that our banks have 80 per cent more capital than the globally mandated norm. Even if we take the RBI norm which is 9 per cent, our banks have 60 per cent more capital. So, the margin of safety for our banks is huge," he said.
"The m-cap ratio is an incorrect measure because it is calculated as a ratio of deposits to market capitalisation. The market capitalisation changes every time the stock prices change. It is primarily affected by the future earnings of the bank which is determined by the Net Interest Margin, growth prospects of the bank and efficiency of the operations of the bank. These factors do not have much to do with the safety of the bank," he added.
He further gave the example of the State Bank of India (SBI) and said that its m-cap ratio is higher than that of the private sector banks yet it is safe.
"Take for instance, SBI which is amongst the top 100 banks of the world. It is as safe as it gets in terms of a bank. The m-cap ratio of SBI is an order of magnitude higher than the private sector banks which shows that m-cap ratio is a wrong measure to assess the safety of the bank," Mr Subramanian said.
Earlier, the Reserve Bank of India (RBI) had said that a moratorium has been imposed on Yes Bank, stressing that the bank's financial capability has undergone a steady decline largely due to the inability of the bank to raise capital.
During the period of moratorium, the Yes Bank Ltd will not, without the permission in writing of the RBI, make in the aggregate, payment to a depositor of a sum exceeding Rs 50,000 lying to his credit in any savings, current or any other deposit account.