What is Capital Adequacy Ratio (CAR) ?

Definition:

  • Capital Adequacy Ratio (CAR) is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. 
  • It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
  • It is measured as:
  • Capital Adequacy Ratio = (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%.