UPSC Prelims 2018·GS1·economy·money and banking

Consider the following statements: 1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues. 2. CAR is decided by each individual bank. Which of the statements given above is/are correct?

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Last updated 8 Jul 2026, 4:39 pm IST
  1. A1 onlyCorrect
  2. B2 only
  3. CBoth 1 and 2
  4. DNeither 1 nor 2

Explanation

Statement 1 is correct: Capital Adequacy Ratio (CAR), also known as Capital to Risk-weighted Assets Ratio (CRAR), is a measure of a bank's financial strength, expressed as a ratio of its capital to its risk-weighted assets. It represents the amount of capital a bank must hold to absorb potential losses from its operations. This ensures that banks have sufficient cushion to protect depositors and promote stability in the financial system.

Statement 2 is incorrect: CAR is not decided by each individual bank. It is mandated by banking regulators, such as the Reserve Bank of India (RBI) in India, and international standards-setting bodies like the Basel Committee on Banking Supervision (BCBS). These regulatory bodies set minimum CAR requirements that all banks under their jurisdiction must adhere to, to ensure systemic financial stability.

economy: Consider the following statements: 1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form
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