Definition
Capital Adequacy Ratio (CAR / CRAR)
The Capital Adequacy Ratio, also called CRAR, is the ratio of a bank's capital to its risk-weighted assets, measuring its ability to absorb losses.
CAR (Capital to Risk-weighted Assets Ratio) is the core solvency yardstick the RBI enforces under Basel III. It divides eligible capital (Tier 1 plus Tier 2) by risk-weighted assets. Indian banks must maintain a minimum CRAR of 9%, above the 8% global Basel minimum, plus a capital conservation buffer.
A higher CRAR means a bank can lend more and absorb shocks without breaching regulatory minimums. When a bank's CRAR falls toward the floor, it must either raise capital or slow loan growth, which is why CRAR is central to assessing a bank's growth headroom.
Related terms
- Risk-Weighted Assets (RWA)Risk-Weighted Assets are a bank's assets weighted according to their credit risk, used as the denominator in capital adequacy calculations.
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Common Equity Tier 1 (CET1)Common Equity Tier 1 is the highest-quality bank capital, consisting of paid-up equity shares, share premium and retained earnings, net of regulatory deductions.
- Basel III NormsBasel III is the global bank regulation framework, adopted by the RBI, that strengthens capital quality, adds liquidity and leverage standards, and introduces capital buffers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.