Q16.
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?
Answer
A
Explanation
Statement 1 is correct: CAR is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities - the amount maintained to offset losses. Statement 2 is not correct: CAR is decided by central banks and bank regulators (like RBI), not by each individual bank, to prevent commercial banks from taking excess leverage and becoming insolvent.