Question

What do you understand by Capital to Risk-weighted Assets Ratio (CRAR)? Why has this ratio been prescribed by Reserve Bank of India for banks? Give the main details of this requirement

12 Jun 2017
Answer :
Word Count : 520

CRAR is the acronym for capital to risk weighted assets ratio, a standard metric to measure balance sheet strength of banks. BASEL I and BASEL II are global capital adequacy rules that prescribe a minimum amount of capital a bank has to hold given the size of its risk weighted assets. The old rules mandate banks to back every Rs. 100 of commercial loans with Rs. 9 of capital irrespective of the nature of these loans. The new rules suggest the amount of capital needed depends on the credit rating of the customer.

This ratio been prescribed by Reserve Bank of India for banks because the banks to increase capital by the share holders. More the capital put by the shareholders or owners of banks, the more will be the capability of the banks to overcome a crisis on its own. Similarly, if the share holders

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