Capital adequacy ratio
CAR
The capital adequacy ratio measures how much capital a bank holds against its risk-weighted loans, which decides how much further lending it can support.
Formula
CAR
CAR (%) = (Tier 1 Capital + Tier 2 Capital) ÷ Risk-Weighted Assets × 100
Benchmark: 17% and above is very good; around 12% or below is a danger sign
Reading the number
Higher is better. Raising capital is hard, because 30 to 40 banks compete for every deposit and each must offer something unique. A bank keeps its CAR healthy in two ways: keeping NPAs as low as possible, because a loan that goes bad is capital being destroyed, and attracting the maximum deposits.
The complete banking chain runs: control NPAs, build CASA, increase capital adequacy, which enables loan growth, which drives ROE, ROA, and EPS.
Indian example
Related ratios
Glossary terms
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