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Capital Adequacy Ratio (CAR/CRAR): formula, tiers and example
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The capital adequacy ratio (CAR), called CRAR (capital to risk-weighted assets ratio) in India, measures a bank's own capital as a percentage of its risk-weighted assets. It shows how much loss a bank can absorb before depositors' money is at risk. A higher ratio means a stronger buffer.
CRAR = (Tier 1 capital + Tier 2 capital) ÷ Risk-weighted assets × 100
The pieces
- Tier 1 capital is the core capital that absorbs losses while the bank keeps running. It includes common equity (paid-up share capital, retained earnings) and additional Tier 1 instruments such as certain perpetual bonds.
- Tier 2 capital is supplementary capital, such as subordinated debt and some reserves, that absorbs losses only when the bank fails.
- Risk-weighted assets (RWA) are the bank's assets multiplied by risk weights. A loan to the government has a low weight, while an unsecured loan to a risky corporate carries a high one. RWA covers credit, market and operational risk.
Worked example
A bank has Tier 1 capital of ₹10,500 crore, Tier 2 capital of ₹2,000 crore and risk-weighted assets of ₹1,00,000 crore.
CRAR = (10,500 + 2,000) ÷ 1,00,000 × 100 = 12.5%.
If the bank's NPAs rise and it must write off ₹1,500 crore from Tier 1, capital falls to ₹11,000 crore and the ratio drops to 11.0%. The bank would then need fresh capital or fewer risky assets to stay compliant. This is why bad loans (see non-performing assets) are a direct threat to capital.
Regulatory floor
Under the RBI's Basel III rules, the minimum total capital ratio is 9% of RWA, plus a 2.5% capital conservation buffer, which is higher than the global minimum (RBI Master Direction on capital adequacy, rbi.org.in; confirm for changes). Details of the global framework are in Basel III. Banks that breach thresholds for capital, asset quality or profitability can be put under the RBI's Prompt Corrective Action framework, which restricts dividends, expansion and management pay.
How bank exams ask about it
Look for the formula, the difference between Tier 1 and Tier 2, what RWA means, and the regulatory minimum. Calculation questions give capital and RWA and ask for the percentage. Revise in the bank-health section of banking awareness.
Where to check
The RBI publishes system-wide CRAR in its Financial Stability Report at rbi.org.in. A bank's own ratio is in its quarterly results.
Frequently asked questions
Is CAR the same as CRAR?
Yes. India uses CRAR, the capital to risk-weighted assets ratio, as its regulatory name for it.
Why does the RBI use risk weights instead of total assets?
Because a rupee lent to a risky borrower deserves more capital behind it than a rupee in government bonds.
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