The Capital Adequacy Ratio (CAR) of a bank is the ratio of its capital to its risk-weighted assets and current liabilities. The capital adequacy ratio, also known as the capital-to-risk-weighted-assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of global financial systems.
What means capital adequacy ratio?
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.
What is capital adequacy ratio as per RBI?
Capital Adequacy Norms Reserve Bank of India has broadly mandated the Basel-I Framework for Primary (Urban) Co-operative Banks in India. Accordingly, they shall maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9% on an ongoing basis.
What is the capital adequacy ratio formula?
What is the Capital Adequacy Ratio Formula? As shown below, the CAR formula is: CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets. The Bank of International Settlements separates capital into Tier 1 and Tier 2 based on the function and quality of the capital.
What is the best capital adequacy ratio?
The minimum capital adequacy ratio for banks as per Basel III norms is 8%. The CAR or the CRAR is computed by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, operational risk, and market risk.