Abstract:
This study attempts to find out behaviour of the banks with respect to their capital adequacy ratio dynamics, by decomposing the financial statements. We used information analysis of the balance sheet and a data set that spanned between 1998 and 2002, for twenty public sector banks. We found that information measures can explain banks’ policy decisions on liabilities and assts reorganisation. Quantitatively, we found that proportional development took place, in both liabilities and asset items of the banks under different capital adequacy ratio values. Evidences did show that banks reorganised their assets and liabilities to achieve higher capital adequacy ratios, but such reorganisation did not result from a planned action of the banks, except in certain isolated cases. We also found that the assets reorganisation was more pronounced than the reorganisation of the liabilities. The study points out that the Reserve Bank of India is justified in enhancing the normative minimum CAR from 8% to 9% effective from the year 2000.
