Deposit/Mcap ratio wrong way to gauge banks’ health, they are well capitalised as per this ratio: CEA

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Updated: Mar 08, 2020 6:46 PM

The RBI on Friday in its draft reconstruction scheme for Yes Bank had noted that SBI will pick up 49 per cent stake in the country’s fourth-largest private sector bank.

Chief Economic Advisor Krishnamurthy Subramanian , yes bankAccording to CEA Subramanian, the RBI has put the 9 per cent CRAR limit for banks.

Refuting the use of deposits to market capitalisation ratio as a measure to gauge banks’ health, Chief Economic Adviser (CEA) Krishnamurthy Subramanian said, “No banking sector expert or banking regulator uses this measure,” PTI reported. Subramanian addressing select media persons at his office said instead it is the capital to risk-weighted assets ratio (CRAR) and other similar metrics that can access the lenders’ health. The minister, citing the international minimum CRAR to be maintained at 8 per cent, said Indian banks “on an average have a CRAR of 14.3 per cent,” which “almost translates into 80 per cent greater capital than the international norms.” Subramaniam allayed rising worries of investors amid the Yes Bank crisis saying Indian banks are well capitalised.

According to the CEA, the Reserve Bank of India (RBI) has put the 9 per cent CRAR limit for banks and hence in comparison to that as well, “our banks have 60 per cent more capital. So this is something that is very important.” He also explained why deposit to market capitalisation ratio is a wrong approach to gauge the bank’s health saying the ratio is essentially of the deposits that a bank has to its market capitalisation. Hence, this ratio does not actually take into account the bank’s safety since it is actually affected by the market capitalisation. “As you all know the stock price of a bank can change minute to minute, as a result, the m-cap ratio will also change minute to minute but the solvency cannot change minute to minute,” he said.

Also read: Yes Bank crisis: CBI begins probe, say sources

Apart from the high CRAR that banks have, the CEA also assuaged concerns over deposits with the limit of insured deposits increased by the government to up to Rs 5 lakh “which covers a large majority of the deposit,” he said. The RBI on Friday in its draft reconstruction scheme for Yes Bank had noted that SBI will pick up 49 per cent stake in the country’s fourth-largest private sector bank.

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