Prelims 2018 · Economy · Question 16
Consider the following statements:<br/>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.<br/>2. CAR is decided by each individual bank.<br/><br/>Which of the statements given above is/are correct?
Answer
1 only
Statement 1: CAR is the minimum capital banks must keep from their own funds as a cushion against losses arising from risky assets/loan defaults. Verdict: Correct.
Statement 2: CAR is not decided by each bank individually; it is prescribed by the banking regulator under Basel norms (in India, by RBI). Verdict: Incorrect.
Therefore, only Statement 1 is correct.