Capital Adequacy Ratio – An Indicator of Financial Soundness A Case Study of HDFC Bank

Abstract

Banking industry is one of most crucial sectors of an economy. Bank is such an institution that works with people's money and works for people's money to earn more money. As banks major business operations rely on the depositors' money which is counted as debt for them, banks have to mandatorily maintain certain rules and regulations to provide protection towards banks' consumers (depositors). In such a case argument can be predominated about the restrictions that why banks must follow these regulations. One of the main reasons is as banks work with monetary unit, failure of one bank or more than one bank can be translated into negative and downward pressure towards the economy. Because of the severe effects existence, precautions are strictly and mandatorily maintained by banks. One of the most important parts of these regulations is to hold an adequate amount of capital. Adequate capital not only ensure solvency but also operate as a shield against loss which in return ensure banks' sustainable economic operations with satisfactory return. However, based on the perspective of banks' solvency it is more urged that adequate capital should be maintained in a standardized level where solvency and profitability will be optimal. In such a case adequate amount of core capital relative to total asset and risk adjusted asset must be maintained as a part of the risk management as well as following the Basel framework. In this paper the focus on one particular prudential regulation, i.e. capital adequacy requirement in the banking sector in India and also analyses the Capital Adequacy norms followed by HDFC Bank, one of the India’s leading private banks.