{"id":94146,"date":"2026-03-21T17:17:07","date_gmt":"2026-03-21T11:47:07","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=94146"},"modified":"2026-03-21T17:17:07","modified_gmt":"2026-03-21T11:47:07","slug":"capital-adequacy-ratio","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/capital-adequacy-ratio\/","title":{"rendered":"Capital Adequacy Ratio (CAR), Meaning, Importance, Purpose"},"content":{"rendered":"

Capital Adequacy Ratio (CAR) is a key indicator of a bank\u2019s financial health, measuring the proportion of its capital to its risk-weighted assets. It ensures that banks have sufficient capital to absorb potential losses, protect depositors, and maintain stability in the financial system. By linking capital to the riskiness of assets, CAR serves as an essential tool for regulators to monitor banking resilience and promote prudent lending practices.<\/span><\/p>\n

Capital Adequacy Ratio (CAR) Meaning and Definition<\/b><\/h2>\n

The <\/span>Capital Adequacy Ratio (CAR)<\/b>, also called the <\/span>Capital-to-Risk Weighted Assets Ratio (CRAR)<\/b>, <\/span>shows how much capital a bank has compared to the risk of its loans and investments.<\/b> It indicates whether a bank has enough financial cushion to cover losses and stay safe without risking depositors\u2019 money.<\/span><\/p>\n

CAR = (Tier 1 Capital + Tier 2 Capital) \u00f7 Risk \u2014 Weighted Assets \u00d7 100<\/b><\/p>\n

Tier 1 Capital (Core Capital)<\/b>: This is the permanent and most reliable capital of a bank, including common equity, retained earnings, and disclosed reserves. Tier 1 capital acts as the primary line of defense against losses, providing a foundation for the bank\u2019s financial stability.<\/span><\/p>\n

Additional Tier 1 Capital (AT1)<\/b>: Instruments like perpetual bonds and hybrid debt that can absorb losses while the bank continues operations. Dividends on AT1 instruments are discretionary and these are subordinate to depositors and other creditors.<\/span>
\n<\/span>Tier 2 Capital (Supplementary Capital)<\/b>: Capital that can absorb losses if a bank fails. It includes subordinated debt, revaluation reserves, and other hybrid instruments with a maturity greater than five years. Tier 2 provides additional but less permanent protection.<\/span>
\n<\/span>Risk-Weighted Assets (RWA)<\/b>: Not all assets carry the same risk. Each asset, including loans, investments, and off-balance sheet exposures, is weighted based on its risk profile. For instance Government securities have almost 0% risk weight while personal loans and unsecured lending May have 100% risk weight.<\/span><\/p>\n

This system ensures that banks holding riskier assets must maintain a higher level of capital to safeguard depositors<\/span><\/p>\n

Importance and Purpose of CAR<\/b><\/h2>\n

CAR serves several crucial functions in the banking and financial system:<\/span><\/p>\n