The Capital Adequacy Ratio, sometimes seen in news, is related to which of the following?

Correct option is A

The correct answer is: (A) Banking operations

• The Capital Adequacy Ratio (CAR), also known as the Capital to Risk (Weighted) Assets Ratio (CRAR), is a key metric in banking operations.

• It measures a bank's capital in relation to its risk-weighted assets and current liabilities.

• This ratio ensures that banks can absorb a reasonable amount of loss and protect depositors’ money.

• It is regulated by central banks like the Reserve Bank of India (RBI) under Basel norms.

• Formula:
  CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets × 100

• RBI Requirement (India): Minimum CAR = 9%, but for Indian Scheduled Commercial Banks, it's at least 10.875% including buffers.

• Tier 1 Capital: Core capital like equity, disclosed reserves.

• Tier 2 Capital: Subordinated debt, hybrid instruments.

• Based on international Basel I, II, and III frameworks.

• Ensures financial stability and minimizes the risk of bank failure.

• Option B – Government budgeting: Relates to fiscal planning, not banking risk.

• Option C – External borrowing of states: Involves sovereign or state loans, not capital adequacy.

• Option D – Trade operations: Covers import/export transactions, unrelated to CAR.