Capital Requirements for Indian Banks: An Empirical Analysis

Abstract

"The paper analyzes the capital requirements for Indian banks on its exposure to the infrastructure sector’s estimated $1 trillion investment requirement from 2013–2018 with 50% programmed to come from the private sector. Current bank exposure to infrastructure is around 17% of total assets which makes meeting this requirement a challenge. The paper also addresses the implications to Indian banks of this proposed expansion in infrastructure lending given the constrained from the implementation of Basel III requirements we well as the emerging risks due to the slowdown of GDP growth and currency depreciation. The study is divided into two parts, (i) developing a macroeconometric model that forecasts bank credit and deposits over 2013–2018 which feeds into a financial model, and (ii) analyzing the implications on bank balance sheets and the challenges in meeting infrastructure financing requirements. The results point to the need for significant capital infusion, at least in public sector banks."