UPSC Previous Year Question | Prelims GS | 2018

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?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer

Correct Answer

1 only

Explanation

Statement 1 correctly describes CAR: a bank must hold a minimum proportion of capital against its risk-weighted assets to absorb losses. Statement 2 is wrong because CAR is prescribed by the central bank (RBI, following Basel norms), not by each bank.

Topics: banking and finance, banking regulation, capital adequacy ratio (car), economy