Some1 asked me what is capital adequacy ratio for banks
1. Banks give out loans these are called risk assets
2. These loan assets decide how much capital a bank needs to have to reduce risk of insolvency
3. Every loan has a risk weight as per a formula devised by RBI
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1. Banks give out loans these are called risk assets
2. These loan assets decide how much capital a bank needs to have to reduce risk of insolvency
3. Every loan has a risk weight as per a formula devised by RBI
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4. A unsecured loan like personal loan has higher risk weight assigned
5. A secured loan like mortgage which has a collateral is assigned a lower risk weight
6. All loans put together by risk weightages are called risk weightage assets
7. Capital Adequacy Ratio is measurement
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5. A secured loan like mortgage which has a collateral is assigned a lower risk weight
6. All loans put together by risk weightages are called risk weightage assets
7. Capital Adequacy Ratio is measurement
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Of banks available capital expressed as a percentage of banks risk weighted assets
8. A bank has two types of capital Tier 1 and Tier 2
9. Tier 1 is mainly equity capital which needs to be min 8% as per Basel 3 norms but as per RBI banks need to maintain 9% min
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8. A bank has two types of capital Tier 1 and Tier 2
9. Tier 1 is mainly equity capital which needs to be min 8% as per Basel 3 norms but as per RBI banks need to maintain 9% min
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10. Tier 2 capital consists of revaluation reserves, hybrid instruments like bond's n subordinated debt n loan loss reserves
11. If a bank lends Rs 1000 then it should have min 9 as capital
12. The more the bank gives out loans the more capital it needs to raise
11. If a bank lends Rs 1000 then it should have min 9 as capital
12. The more the bank gives out loans the more capital it needs to raise
Formula to calculate CAR
CAR = (tier 1 capital plus tier 2 capital) / Risk Weighted Assets
CAR = (tier 1 capital plus tier 2 capital) / Risk Weighted Assets
