What is capital Adequacy Ratio (CAR), CRR, SLR in a bank? Important banking terminologies



Capital Adequacy ratio


CAR is a tool used to measure how much of the bank's capital is available to cover their risks. It shows how much of their capital is available to support its assets (loans). The bank with higher CAR means it has enough capital to cover potential losses and investors can trust these banks to deposit their money than the banks with low CAR.

According to the Reserve Bank of India, the minimum CAR to be maintained by all the banks (both domestic and foreign banks) in India is 9%.

Below is the formula to calculate CAR

CAR = Tier 1 capital + Tier 2 capital/ Risk Weighted Assets (RAW)

Tier 1 Capital - These are bank's core equities

Tier 2 Capital - Subordinated debt instruments

RAW - Assets are classified and assigned different risk weights based on their credit risk, market, and operational risk. 

It is calculated by multiplying each asset value by its risk weight. Risk weight is the percentage of risk the particular asset holds. For example, government securities have minimum or no risks. In most cases, government securities are risk free assets. Hence, the risk weight assigned to government securities would be 0%. If a company holds Rs. 10,000 worth government securities, RAW of that would be 0 (10,000*0%). Similarly, different assets have different risk weights. Loans given to individuals and corporates who have less credit score, unsecured loans, or loans to borrowers with high likelihood of default have high risk weights like 50% - 250%.


Cash Reserve Ratio

CRR is also a regulatory tool used RBI to control the liquidity of money in the banking system. It refers to the minimum percentage of bank's deposits that are required to be kept in cash with RBI. Currently, RBI requires every bank to maintain 4.5 % of their total deposits in cash. Scheduled commercial banks are required to maintain CRR with RBI while non- scheduled banks can maintain CRR with themselves. But every bank must maintain CRR as part of the regulatory compliance.


Statutory Liquidity Ratio


SLR is a tool used to stabilize the economy by controlling bank credit and ensuring solvency of the banks. It requires the bank to maintain a percentage of total liability in form of liquid assets like gold, cash, government securities. Current SLR is 18%.




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