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How to calculate Risk Weighted Asset in banks?

Just open the balance sheet of any bank. Write down all the assets of banks in excel sheet and then multiply with the risk associated with each asset. Finally, add all of them to get Risk Weighted Assets.

How to find risk factor associated with bank?

Following doc from RBI website will give every risk detail.

rbidocs.rbi.org.in/rdocs/content/…

Let us take an example( Asset side of typical bank)- It can be loan or investment.

1. Loan given to Govt = 1000 cr.

2. Loan given to commercial bank = 500 cr.

3. Investment in shares = 100 cr.

4. Cash = 200 cr.

Total asset = 1800 cr.

Risk:

Loan to Govt = 0%

Loan to commercial bank = 20%

Investment in shares = 125%

Cash = 0%

Risk Weight Assets

= 1000*0%+500*20%+ 100*125%+200*0%

= 225 cr.

So, as we see on total asset of 1800 cr, risk weighted asset is only 225 cr.

This Risk Weighted Asset is then used to calculate very important parameter that is Capital Adequacy Ratio(CAR). This parameter is used to check health of bank.

CAR = total capital/risk-weighted-asset

RBI has minimum CAR requirements for which banks need to adhere all the time.