Consider the following statements:
- 1.Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- 2.CAR is decided by each individual bank.
Which of the statements given above is/are correct?
Answer & explanation
Answer: (a) 1 only
A bank's own capital is the cushion that absorbs losses, for instance when borrowers default, and the capital adequacy ratio measures that capital against the bank's risk-weighted assets. The minimum ratio is not left to each bank: in India the Reserve Bank of India prescribes it, following the Basel norms.
- ✓ 1. Capital adequacy means holding enough own funds, relative to risk-weighted assets, so that losses on loans and other assets can be absorbed without the bank becoming insolvent.
- ✗ 2. The RBI's Basel III Master Circular (2014) requires scheduled commercial banks to keep a minimum total capital of 9% of risk-weighted assets; banks may hold more but cannot set the floor themselves.
Remember · CAR (or CRAR) = capital ÷ risk-weighted assets. RBI sets the minimum at 9% (Basel III asks for 8%); with the 2.5% conservation buffer it is 11.5%.
Sources
- Master Circular – Basel III Capital Regulations, Reserve Bank of India, 1 July 2014 (Glossary) ↗ “Capital adequacy A measure of the adequacy of an entity's capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. … scheduled commercial banks (excluding LABs and RRBs) operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e. capital to risk weighted assets (CRAR).”
Question and answer: UPSC's official GS Paper I (2018, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·