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 ?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Correct answer
Explanation
The correct answer is A, 1 only. CAR is the cushion of a bank's own capital against losses from loans that are not repaid, and its minimum is fixed by the regulator, not by each bank.
The Capital Adequacy Ratio, also called the Capital to Risk-weighted Assets Ratio (CRAR), is a bank's capital divided by its risk-weighted assets, expressed as a percentage. Riskier loans carry a higher weight, so a bank that lends more riskily must hold more capital. The global standard comes from the Basel Committee on Banking Supervision, and in India the Reserve Bank of India prescribes the minimum for all banks under its Basel III rules, which are stricter than the Basel minimum. A bank may keep more than the minimum but cannot choose a lower figure.
B is wrong: statement 2 is false, as the RBI, not the individual bank, sets the required CAR.
C is wrong: only statement 1 is correct.
D is wrong: statement 1 correctly describes the purpose of CAR.
Exam tip: CAR = capital ÷ risk-weighted assets; norms from Basel, minimum set in India by the RBI.
Practice Questions
View allConsider the following statements about the Non-Banking Financial Companies (NBFCs) in India : 1. NBFCs cannot accept demand deposits. 2. All the NBFCs operating in India have to be registered with the RBI. 3. NBFCs form part of the payment and settlement system and can issue cheque drawn on itself. 4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs. Which of the statements given above is/are correct ?
- A.1 and 4
- B.1, 2 and 3
- C.4 only
- D.2, 3 and 4
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Read the full explanation →Which of the following is not included in the assets of a commercial bank in India?
- A.Advances
- B.Deposits
- C.Investments
- D.Money at call and short notice
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Deposits are money the bank owes to its customers, so they sit on the liabilities side of its balance sheet.
Read the full explanation →Which one of the following is considered as an agency function of commercial banks in India ?
- A.Acceptance of deposits
- B.Investment of surplus funds
- C.Acceptance of income tax payments
- D.Providing overdraft facilities
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When a bank collects tax, it acts as an agent on behalf of its customer and the government, which is an agency function.
Read the full explanation →With reference to Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as a time-frame for spending it. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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Read the full explanation →The Service Area Approach was implemented under the purview of
- A.Integrated Rural Development Programme
- B.Lead Bank Scheme
- C.Mahatma Gandhi National Rural Employment Guarantee Scheme
- D.National Skill Development Mission
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The Service Area Approach, introduced by the RBI in 1989, worked within the framework of the Lead Bank Scheme to plan rural credit village by village.
Read the full explanation →