Capital Adequacy Ratio or CAR or CRAR It is ratio of capital fund to risk weighted assets
Objectives of CAR The fundamental objective behind the norms is to strengthen the soundness and stability of the banking system.
Committee on Banking Regulations The Committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines on capital measures and capital standards in July 1988 which were been accepted by Central Banks in various countries including RBI.
Minimum requirements of capital fund in India: * Existing Banks 09 % * New Private Sector Banks 10 % * Banks undertaking Insurance business 10 % * Local Area Banks 15%
For computation of CAR Tier I capital Tier II capital Risk Weighted Assets (RWA)
Tier I capital(permanent) Paid up equity capital Statutory reserves Capital reserves Other disclosed free reserves Less: Equity investments in subsidiaries Intangible assets Current and Accumulated Losses, if any
Tier II Capital(not permanent) Undisclosed reserves and cumulative perpetual preference shares- Revaluation Reserves (RR)- General Provisions and Loss Reserves (GPLR)- Hybrid Debt Capital Instruments- Subordinated Debts-
Note: Tier II capital cannot be more than Tier I capital.
Capital Adequacy Ratio = (Tier I capital + Tier II capital) / RWA