What is Capital Adequacy Ratio (CAR) ?
- 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%.