The Capital Adequacy Ratio (CAR), also called the Capital to Risk-Weighted Assets Ratio (CRAR), measures how much of a bank’s own capital stands behind its risky assets. It tells regulators whether a bank can absorb losses on bad loans without failing its depositors. In India the RBI applies the Basel III framework with a minimum CRAR of 9%, stricter than the global 8%, and a total of 11.5% once the capital conservation buffer is added. It is a staple of GS Paper III economy and of Prelims.
Quick Answer
Formula: CRAR = (Tier 1 + Tier 2 capital) / Risk-weighted assets x 100. India’s minimum (Basel III): CRAR 9% (Basel norm 8%) + Capital Conservation Buffer 2.5% = 11.5%; Common Equity Tier 1 at least 5.5% (8% with the buffer); Tier 1 at least 7%. D-SIBs (SBI, HDFC Bank, ICICI Bank) must hold extra CET1. NBFCs: CRAR 15%. Regulator: RBI, under norms set by the Basel Committee on Banking Supervision (Bank for International Settlements, Basel).
How CRAR Is Calculated
CRAR = (Tier 1 capital + Tier 2 capital) / Risk-Weighted Assets (RWA) x 100
Tier 1 capital (going-concern capital)
- Common Equity Tier 1 (CET1): paid-up equity capital, share premium, statutory and capital reserves, retained earnings. This is the highest-quality capital.
- Additional Tier 1 (AT1): perpetual instruments such as AT1 bonds, which can be written down or converted to equity if the bank’s capital falls below a trigger.
Tier 2 capital (gone-concern capital)
- General provisions and loss reserves (up to a limit), revaluation reserves at a discount, and subordinated debt with at least five years’ maturity. It absorbs losses only when a bank is being wound up.
Risk-weighted assets
Each asset is multiplied by a risk weight that reflects its chance of default: cash and government securities carry 0%, while unsecured personal loans or loans to riskier borrowers carry 100% or more. RWA covers credit risk, market risk and operational risk.
Worked example
A bank has CET1 of Rs 800 crore, AT1 of Rs 200 crore, Tier 2 of Rs 300 crore and RWA of Rs 10,000 crore.
- CET1 ratio = 800 / 10,000 = 8%
- Tier 1 ratio = 1,000 / 10,000 = 10%
- CRAR = 1,300 / 10,000 = 13%, above the 11.5% requirement.
Basel III Capital Norms in India vs Global
| Requirement | Basel III (global) | RBI (India) |
|---|---|---|
| Minimum CET1 | 4.5% | 5.5% |
| Minimum Tier 1 | 6% | 7% |
| Minimum total CRAR | 8% | 9% |
| Capital Conservation Buffer (CCB) | 2.5% | 2.5% |
| CET1 + CCB | 7% | 8% |
| Total CRAR + CCB | 10.5% | 11.5% |
| Countercyclical Capital Buffer | 0–2.5% | Framework in place, not activated (0%) |
| Leverage ratio | 3% | 4% for D-SIBs, 3.5% for other banks |
Capital Norms for Other Lenders
| Entity | Minimum CRAR |
|---|---|
| Scheduled commercial banks | 9% (+2.5% CCB) |
| Small Finance Banks | 15% |
| Payments Banks | 15% |
| NBFCs (deposit-taking and NBFC-ML and above) | 15% (Tier 1 at least 10%) |
| Regional Rural Banks | 9% |
Domestic Systemically Important Banks (D-SIBs)
The RBI identifies banks that are "too big to fail" and requires them to hold extra CET1 capital. The current D-SIBs are State Bank of India, HDFC Bank and ICICI Bank, placed in different buckets, with SBI facing the highest surcharge.
The Basel Accords at a Glance
| Accord | Year | Key feature |
|---|---|---|
| Basel I | 1988 | Minimum capital of 8% of risk-weighted assets; focus on credit risk |
| Basel II | 2004 | Three pillars: minimum capital, supervisory review, market discipline; added operational risk |
| Basel III | 2010 (after the 2008 crisis) | Higher quality capital (CET1), buffers, leverage ratio, liquidity ratios (LCR and NSFR) |
The Basel norms are framed by the Basel Committee on Banking Supervision, hosted by the Bank for International Settlements (BIS) in Basel, Switzerland. India is a member.
Why CRAR Matters: Issues for Mains
- Depositor protection: a capital cushion absorbs losses before deposits are hit.
- Lending capacity: low capital limits a bank’s ability to lend; the RBI’s Prompt Corrective Action (PCA) framework restricts lending and dividends when CRAR, asset quality or leverage breach thresholds.
- Recapitalisation of public sector banks: after the twin-balance-sheet crisis, the government injected over Rs 3 lakh crore into PSBs between 2015–16 and 2021–22, partly through recapitalisation bonds.
- Trade-off: higher capital makes banks safer but raises their cost of funds, which can raise lending rates.
- AT1 bond risk: the 2020 write-down of Yes Bank’s AT1 bonds showed retail investors that these instruments can lose all value.
For broader banking and economy topics, see our Indian economy questions for UPSC Mains.
