Capital Adequacy Ratio (CAR): Tiers, Norms and Importance
Why in the news
The Shapoorji Pallonji Group reportedly sought three years from RBI for Sterling Investment Corp to meet tougher capital norms linked to a bond issue.
About CAR
- Shows a bank’s strength against financial stress; higher CAR means lower insolvency risk.
- Enforced by regulators for a stable banking sector.
| Component | Role | Includes |
|---|---|---|
| Tier 1 | Absorbs losses while the bank runs | Equity capital, retained earnings, disclosed reserves |
| Tier 2 | Absorbs losses on winding up | Revaluation reserves, hybrids, subordinated debt |
| RWA | Assets weighted for credit, market, operational risk | Different assets, different risk |
RBI requirement
- 12% for public sector banks; 9% for scheduled commercial banks.
Significance
- Prevents systemic collapse, protects depositors, meets Basel III standards.
Exam angle
- Tier 1 = core; Tier 2 = supplementary; Basel III link.