Definition
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.
Not all assets are equally risky, so Basel norms assign each a risk weight. Government securities carry near-zero weight, home loans a low weight, and unsecured personal loans or low-rated corporate exposures a high weight. The weighted total is the bank's RWA.
RWA matters because capital requirements scale with it: riskier lending consumes more capital. In 2023 the RBI raised risk weights on unsecured consumer credit and bank lending to NBFCs to cool fast growth, forcing lenders to hold more capital against those segments.
Related terms
- 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.
- 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.
- 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.
- Standardised Approach (Credit Risk)The Standardised Approach is the Basel method for calculating credit-risk capital using regulator-prescribed risk weights, often based on external credit ratings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.