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?

QUESTION

Easy

Economy

Prelims 2018

Consider the following statements:

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.
CAR is decided by each individual bank.

Which of the statements given above is/are correct?

Select an option to attempt

Explanation

Statement 1 is correct. Capital Adequacy Ratio (CAR): This is a crucial regulatory tool used by central banks to ensure banks have sufficient capital reserves to absorb potential financial losses. It acts as a buffer to protect depositors' funds in case of loan defaults or other financial risks.

Statement 2 is Incorrect. CAR is not decided by individual banks. The CAR is mandated and regulated by the central bank of a country, in India's case, the Reserve Bank of India (RBI). The RBI sets a minimum CAR that all banks operating in the country must adhere to. This ensures a level playing field and safeguards the financial system's stability.

Trusted by 2L aspirants