Low RWA but high GNPA? Risk performance of some Indian banks under Basel II-SA

Abstract

Indian banks have moved toward a more stringent regime of risk management with the implementation of Basel II guidelines under the standardised approach. While banks may have benefited from the increasing sensitivity to risk, there have also been challenges for interpreting their risk performance. It has been observed that some banks report lower risk, measured as riskweighted asset density, for their portfolios and yet have higher gross non-performing assets than others. Such an observation raises the question as to how the implementation of Basel II guidelines would lead to improvements in the risk performance of banks. The study reviews the structure of the Basel II risk weightings and determinants of the risk-weighted and gross non-performing assets of banks, before analysing the empirical data of 20 banks in India for the period 2009–2010 to 2013–2014. It has been found that the business mix of banks, their client portfolios and lending orientation strongly determine the risk of their asset portfolios, but not their default performance. While the structure of the Basel II standardised approach may provide a certain flexibility to banks to project the riskiness of their assets, the default performance may be determined by other factors such as conditions in the macro-economic environment and capabilities for credit and nonperforming asset management.