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Credit Risk Capital Estimation Under IRB Approach for Banks in India

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  • Richa Verma Bajaj

    (National Institute of Bank Management)

Abstract

In this paper, an attempt is made to estimate credit risk capital charge for public sector and private sector banks in India for the period from 2007–2008 to 2013–2014 under advanced internal rating based (AIRB) approach using Basel risk weight formula. The analysis brings out that credit risk capital charges would be higher for the banks with high default risk and recovery risk and vice-versa. The inter-sector comparison indicates that a substantial proportion of the overall additional capital requirement for credit risk would falls on the public sector banks. Hence, banks in this sector requires improvement in appraisal system and loan recovery mechanism to reduce burden of additional credit risk capital charges and for better-quality performance on risk adjusted basis.

Suggested Citation

  • Richa Verma Bajaj, 2018. "Credit Risk Capital Estimation Under IRB Approach for Banks in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(2), pages 475-500, June.
    • Handle: RePEc:spr:jqecon:v:16:y:2018:i:2:d:10.1007_s40953-017-0082-7
    DOI: 10.1007/s40953-017-0082-7
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    References listed on IDEAS

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    1. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
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    More about this item

    Keywords

    Basel II; Credit loss estimation; Systematic risk; Credit portfolio risk; Risk based capital;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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