Capital Adequacy Ratio (CAR)


Capital Adequacy Ratio (CAR) is the ratio which protects banks against excess leverage, insolvency and keeps them out of difficulty. It is defined as the ratio of banks capital in relation to its current liabilities and risk weighted assets. Risk weighted assets is a measure of amount of banks assets, adjusted for risks. An appropriate level of capital adequacy ensures that the bank has sufficient capital to expand its business, while at the same time its net worth is enough to absorb any financial downturns without becoming insolvent. It is the ratio which determines banks capacity to meet the time liabilities and other risks such as credit risk, market risk, operational risk etc. As per RBI norms, Indian SCBs should have a CAR of 9% i.e., 1% more than stipulated Basel norms while public sector banks are emphasized to keep this ratio at 12%. Capital adequacy ratio is defined as:

CAR  is measured as -

CAR = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets 

The risk weighted assets take into account credit risk, market risk and operational risk. 

The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%. Capital adequacy ratio (CAR) is one of the measures which ensure the financial soundness of banks in absorbing a reasonable amount of loss

Monday, 11th Apr 2016, 12:37:49 AM

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