CRAR full form in banking is the Capital-to-risk weighted assets ratio. Also called the Captial Adequacy ratio is the ratio of a financial institution/bank’s available capital concerning the risks indulged in loan disbursement. CAR is the ratio of a bank’s capital to its liabilities and assets. Financial officers use a tool called credit solvency maintenance to keep the bank financially sound. Generally, banking regulators advise banks to retain and hold a specific % of their credit risk as their assets. It is indicated in terms of percentage.
Objectives of Capital Adequacy Ratio
The Reserve Bank of India and other international banking regulations introduced CRAR for banks to take excess leverage in the process and prevent them from becoming debt-laden without plenty of liquidity to act as support in case of any monetary pressure.
In this way, banking guidelines implement financial discipline among all financial institutions and maintain the banking sector’s health, hence protecting customers’ investments.
How to calculate the CRAR of a bank?
CRAR is calculated by adding a bank’s tier 1 and tier 2 capital and dividing the overall by its total risk-weighted assets.
- Tier 1 CRAR
Eligible Tier 1 Capital funds = CR RWA + Operational Risk RWA+ Market Risk RWA
Total CRAR – Total Capital funds/ Credit Risk RWA after adding Operational Risk RWA + Market Risk RWA.