Rama Mittal, Asst. Professor
Capital Adequacy Ratio - CAR
A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted creditexposures.Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."This ratio is used to protect depositors and promote the stability and efficiency of financialsystems around the world.Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of awinding-up and so provides a lesser degree of protection to depositors.The Committee on Banking Regulations and Supervisory Practices (Basel Committee) hadreleased the guidelines on capital measures and capital standards in July 1988 which were beenaccepted by Central Banks in various countries including RBI. In India it has been implemented by RBI w.e.f. 1.4.92
Objectives of CAR :
The fundamental objective behind the norms is to strengthen the soundnessand stability of the banking system.
Capital Adequacy Ratio or CAR or CRAR:
It is ratio of capital fund to risk weighted assetsexpressed in percentage terms i.e.
Minimum requirements of capital fund in India
:* Existing Banks 09 %* New Private Sector Banks 10 %* Banks undertaking Insurance business 10 %* Local Area Banks 15%
Capital Fund has two tiers
Tier I capital include
*paid-up capital*statutory reserves*other disclosed free reserves*capital reserves representing surplus arising out of sale proceeds of assets.Minus*equity investments in subsidiaries,