What do you understand by Capital to Risk-weighted Assets Ratio? Discu

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

22 Apr 2025

Answer :

Word Count : 561

Capital to Risk-weighted Assets Ratio (CRAR), also known as Capital Adequacy Ratio (CAR), is a key indicator in strategic financial management that measures the capital strength of a bank relative to its risk-weighted assets. It ensures that banks have sufficient capital to absorb potential losses and safeguard depositors’ money, thereby enhancing the overall stability and efficiency of the financial system.

CRAR is expressed as a percentage and is calculated using the formula:

CRAR = (Tier I Capital + Tier II Capital) / Risk-weighted Assets × 100

Risk-weighted assets refer to the total assets of a bank, weighted by credit risk, market risk, and operational risk. This ratio is used by regulators, such as the Reserve Bank of India (RBI), to ensure that banks maintain adequate capital to mitigate various risks.

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