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?

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Correct answer: 1 only. The Capital Adequacy Ratio (CAR) measures a bank’s ability to handle risks like credit and operational risks while meeting its obligations. Simply put, it acts as a ‘cushion’ to ab- sorb potential losses, protecting depositors and lenders. Reg- ulators set and monitor minimum CAR levels to maintain trust in the banking system and ensure stability. A strong CAR shows that a bank can handle losses without affecting its financial com- mitments, reducing risks from defaults or unexpected economic challenges. The capital adequacy ratio is computed by dividing the total capital of a bank by its risk-weighted assets. This is why the CAR is also called the Capital to Risk (Weighted) Assets Ratio (CRAR). Statement 1 is correct : Capital Adequacy Ratio (CAR) is the ra- tio of a bank’s capital in relation to its risk weighted assets and current liabilities. Statement 2 is incorrect : CAR is decided by central banks and bank regulators to prevent commercial banks from taking Indian Economy 283 excess leverage and becoming insolvent in the process. The Re- serve Bank of In

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