Risk Weighted Assets Density as a Parameter of Risk Profile of Bank Assets: A Study of Indian Banks
The IUP Journal of Financial Risk Management, Vol. XV, No. 2, June 2018, pp. 62-70
Posted: 20 Nov 2018
Date Written: October 29, 2018
Abstract
Capital Adequacy Ratio (CAR) signifies the proportion of capital funds of banks in relation to Risk Weighted Assets (RWAs). Bank assets carry risk of delinquency depending upon the nature and volume of assets. Any loss arising from failure of assets has to be borne by capital funds. The capital must, therefore, bear prescribed ratio in relation to risk assessed assets in order to meet regulatory norms. RWAs constitute the risk profile of bank’s assets portfolio. The ratio of RWAs to total asset exposure provides a measure of riskiness of assets. The ratio has come to be known as RWA density and its variance from year to year indicates change in risk profile of asset portfolio of the bank. An increase in RWA density over a period shows that overall risk profile of bank assets has deteriorated. This may arise due to asset with higher risk weight substituting lower risk assets, without any change in risk weight factors. Similarly, a decrease in RWA density of bank would indicate that risk quality of assets has improved. The paper examines the variations in risk profile of bank assets using the parameter of RWA density, both for public and private sector banks in India.
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