Capital Adequecy Ratio
Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risk such as credit risk, operational risk. Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.
Capital adequacy ratio is defined as: CAR = Capital/Risk.
Capital Adequacy Ratio under Basel I: Capital Adequacy Ratio = Tier I Capital + Tier II Capital / Risk Weighted Assets
Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital + Tier II Capital)/ Market Risk + Credit Risk + Operation Risk.
Minimum Requirement of Capital Adequacy Ratio (CAR) for banks in India: Under Basel II norms, 8 per cent is the prescribed Capital Adequacy Norm.
• In case of Scheduled Commercial Banks CAR= 9 per cent
• For New Private Sector Banks CAR = 10 per cent
• For Banks undertaking Insurance Business CAR = 10 per cent
• For Local Area Banks CAR =15 per cent