Indian banking system?s capitalisation has improved over the years, but it is much below the capital levels of banks in peer countries including Brazil, Russia, China, Indonesia and Singapore, according to Moody?s banking system outlook for India. The ratings agency said the improvement in Indian banks capitalisation has been marginal and not sufficient to protect the sector from challenges. Indian bankers and government officials, though, argued that the local banks are well capitalised to withstand any global credit squeeze, and that the Reserve Bank of India has been stringent enough in mandating above Basel II levels of capital for banks.

?The Reserve Bank of India has been much more stringent compared to its global peers, and has mandated a tier 1 capital of 9%, as compared to the 8% mandated under the Basel II norms,? said Oriental Bank of Commerce CMD Nagesh Pydah. OBC?s tier 1 capital stood at 9.9%.

Tier 1 capital is the core capital comprising of equity, disclosed reserves and perpetual debt. Under Basel III norms, even perpetual debt is kept outside the definition of tier 1 capital.

?Moreover, the Indian banking sector does not have the kind of exotic accounting, exotic products and off balance sheet exposures that had roiled the financial institutions in much of the US and Europe,? he said.

Care Ratings banking analyst Anuj Jain said it is difficult to infer a banking system?s inherent strengths based only on the level of capitalisation.

?Hidden risks in the Indian banking system are much less compared to other countries. The banks have also started building counter cyclical buffers in terms of higher provision coverage ratios. So as such our banking system is well capitalised,? he said.

Moody?s report said: ?Indian banks rank at the low end versus their peers in Brazil, Russia, China, and Southeast Asia in terms of capitalisation; the banks? tier 1 capital ratio of 9.2% in 2010 was higher than only that of their peers in the Philippines (8.9%) and Vietnam (8%).?

Brazil, Indonesia, Russia; each had double digit tier 1 capital in 2010, while Singapore topped the chart with 15.75%. The report underscored the need for the government to capitalise the state-owned banks, which account for 75% of the market in terms of assets.

Finance ministry officials have criticised the report, and reiterated the government?s commitment to ensure 8% tier 1 capital for state-owned banks. The government plans to infuse R14,000 crore in the banks this fiscal.

Jain said there are also reports highlighting the massive problems in the Chinese banking system. ?As far as China is concerned, as per an IMF report, nearly 27% of the total lending by the Chinese banks in 2010 were for unviable projects. ?This is a huge bubble which can burst.?

Moody?s expects the banking system?s tier 1 capital to fall by almost four percentage points to 5.6% in case of a ?highly adverse scenario?.

The Bombay Stock Exchange?s banking sector index ? Bankex ? fell 2.62% on Wednesday. The markets were closed on Thursday.