With reference to Capital Adequacy Ratio CAR consider the following statements 1 It is the ratio of ...........

Economic Affairs Money Supply and Monetary Policy

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With reference to Capital Adequacy Ratio (CAR), consider the following statements:

1. It is the ratio of banks capital to its riskweighted credit exposure (loans).

2. A bank with lower CAR is considered safe. Which of the statements given above is/are correct?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

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Explanation:

Statement 1 is correct. Capital Adequacy Ratio is the measure of a bank's financial strength expressed by the ratio of its capital (net worth and subordinated debt) to its risk-weighted credit exposure (loans). It is also called CRAR-Capital to Risk-weighted Assets Ratio.

Statement 2 is incorrect. A bank with a higher capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth. Most banks in India have a capital adequacy of more than 12 %.