EMPIRICAL STUDY ON THE DETERMINANTS OF CAPITAL ADEQUACY RATIO WITH REFERENCE TO COMMERCIAL BANKS IN INDIA

Abstract:

The research study is conducted particularly to analyze the determinants of capital adequacy requirement in India and determine the effect of various factors on capital adequacy ratio and profitability of the banks. According to Alfred Marshal ?Capital is that part of wealth which is devoted to create further wealth. The banking sector takes the risks of all business or industry directly or indirectly, so capital management becomes more important for banking industry. Traditionally, banking operations were simple and generally operated on 3-6-3 rule but now due to evolution of additional services banking services has been complicated. The new banking regulation has motivated our study which mainly focused on practices of risk minimization related to regulatory capital assets. The purpose of the study is finding out the essence of maintaining Capital adequacy ratio according to the regulation or more than that and what are the factors leading to maintain that level of CAR. Analysis has been conducted on study of financial statements of 34 banks, 19 public banks and 15 private banks. The study covers 10 years from 2005-14. To find the relationship among those dependent and independent factors correlation analysis and multiple regression analysis have been used. The outcome of the study is showing that average CAR for the study period has been 13.37%, correlation amongst CAR and most of the factors is strongly & positively correlated. Such as, Reserve (r=0.62), D/E ratio (0.62), ROA (r=0.56) and Interest income ratio (r=0.47) while liquidity is strongly & negatively correlated to CAR (r=-0.69).