Capital Adequacy Ratio Meaning, Definition: In this post we are going to tell you about the meaning of Capital Adequacy Ratio which is a very important term and questions are asked frequently about the Capital Adequacy Ratio in bank exams and interviews.
Capital Adequacy Ratio (CAR), which is also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank’s capital to its risk. Reserve Bank of India keeps on tracking a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. In other words Capital Adequacy Ratio can be defined as a measure of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.
To clarify more about CAR, Capital adequacy ratio is the ratio which determines a bank’s capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the simplest formulation, a bank’s capital is the “cushion” for potential losses, and protects the bank’s depositors and other lenders.