Analysing the Determinants of Total Risk in Basel III Transition Era: Evidence from Indian Public and Private Sector Banks
Banking sector in India has implemented Basel norms since 1998. To comply with Basel norms, Banks in India had to undergo a series of reforms and changes such as technological advancements, balance sheet restructuring, credit quality enhancements and capital raising strategies. From Basel I to Basel III, requirement of maintaining Capital Adequacy Ratio has changed which brought significant changes in portfolio management of Banks in India. With the introduction of Basel III norms, Banks had to revisit and challenge their own old business strategies fundamentally for raising quality capital as prescribed by Basel III norms and maintain profitability at the same time. In this paper, we will focus on impact of Basel III norms on Indian Banks and determine dependent and independent factors of total risk in Basel III transition era. This study aims at investigating the internal and external factors affecting bank's total risk. We applied panel data regression and relevant econometric tests such as unit root test, multicollinearity test, panel data analysis and test of heteroscedasticity and serial correlation for 35 Indian public and private sector banks from 2011 to 2016. We concluded that among internal factors, capital and profitability are statistically significant, whereas size, deposits to total asset ratio, loans to total asset ratio, operating expenses to total asset ratio, interest expense to total asset ratio, and liquid asset to total asset ratio do not show any significant relationship with bank's total risk in India. In addition, total risk does not show any association with macroeconomic indicators such as GDP growth rate and inflation rate in our sample. Based on the findings, we proposed solvency model for Indian Banks.