Pvt banks? leverage ratio rises to 10.8%, PSBs? lingers at 5.39%

Private banks leverage ratio during 2009-10 went up as against a decline recorded by the public lenders, according to a study of 12 private banks and 25 PSBs in 2009-10 and 2008-09. Between 2008-09 and 2009-10, average leverage ratio of private banks rose to 10.80% from 9.98% and in PSBs, dropped from 5.51% to 5.39%.

CARE joint general manager Vijay Agrawal said, ?The improvement in the leverage ratio for the private sector banks is the indirect fallout of low credit growth as well as the regular capital issuances. On the other hand, the credit growth for PSBs was higher at 20% for FY10. In addition, the capital raising ability of PSBs is influenced by the extent of government holding. Further the government has iterated its intention of maintaining the adequate capitalisation levels in PSBs.?

The leverage ratio is a prudential tool that helps limit excessive leverage in a banking system. It is the ratio of a bank?s equity to the unweighted sum of its total assets. It normally gives an indication of the equity support for a banks? assets.

In other words, this ratio is designed to indicate the amount of equity or capital support or assets that can protect the bank from unexpected events. The smaller this support gets, the greater the likelihood the bank may become insolvent.

Thus, any significant decline in a bank?s leverage ratio presents increased risk to the deposit insurance fund and raises regulatory concern, especially if the bank becomes under-capitalised. Banks should have at least 3% leverage ratio for healthy operation.

This ratio has inherent limitations, however, and should therefore be considered as just one of a set of macro- and micro-prudential policy tools.

The highest increase in the leverage ratio was registered by Axis Bank, from 6.91% to 8.88%. In HDFC Banks, the rise was from 7.99% to 9.67%. YES Bank had a leverage ratio of 7.09% in 2008-09, which rose to 8.49% by 2009-10. ICICI Bank also showed an increase in leverage ratio from 13.04% to 14.19% during the study period. Only 50% of private banks showed a decline in their leverage ratio during 2009-10. In 2008-09 and 2009-10, private banks had a higher leverage ratio compared to PSBs.

The highest and lowest leverage ratio was registered during 2009-10 in the case of ICICI Bank and Bank of Rajasthan respectively.

On the other hand, between 2008-09 and 2009-10, average leverage ratio of 25 PSBs decreased marginally from 5.51% during 2008-09 to 5.39% during 2009-10. Nearly 60% of PSBs leverage ratio declined during 2009-10. Significant decline in leverage ratio was reported by IDBI Bank, Oriental Bank of Commerce, Andhra Bank and Bank Of India.