Question

What do you understand by Capital to Risk-weighted Assets Ratio? Discuss the Elements of Tier I and Tier II capital as prescribed for Indian Banks and their limits.

09 Jan 2025
Answer :
Word Count : 605

The Capital to Risk-weighted Assets Ratio (CRAR), also known as Capital Adequacy Ratio (CAR), is a key measure used by banks to ensure they have enough capital to cover the risks they are exposed to. This ratio is calculated by dividing a bank's capital by its risk-weighted assets. The purpose of CRAR is to ensure that a bank has sufficient capital to absorb potential losses and remains solvent even in times of economic stress. A higher CRAR indicates a stronger financial position, reducing the risk of insolvency.

Risk-weighted assets (RWA) are calculated by assigning different weights to different types of assets based on their credit ratings and risk profiles. For example, government bonds may have a low weight due to their low risk, while loans to high-risk borrowers may have a higher weight. The ratio helps to assess the bank's ability to handle its risk exposures and maintain a cushion against ___ ________ ______ _____ _____.
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