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 ?
- (a) 1 only ✓ UPSC's answer
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Why the answer is (a)
• Capital Adequacy Ratio = a bank's capital (Tier 1 + Tier 2) ÷ risk-weighted assets; it is the cushion of the bank's own funds that absorbs losses if borrowers default (statement 1).
• Statement 2 is wrong: CAR is prescribed by the regulator, not by each bank — the RBI requires Indian banks to hold at least 9% (Basel III norm 8%), plus a capital conservation buffer.
• Hence 1 only, option (a).
Why the other options are wrong
- (b) 2 only
- Statement 2 is wrong: the RBI sets CAR requirements.
- (c) Both 1 and 2
- Statement 2 is wrong.
- (d) Neither 1 nor 2
- Statement 1 is correct: CAR is the bank's loss-absorbing own funds.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2018, held on 3 June 2018. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.