Capital Adequacy Norms
Introduction to Capital Adequacy Norms
Along with profitability and safety, banks also give importance to Solvency. Solvency refers to the situation where assets are equal to or more than liabilities. A bank should select its assets in such a way that the shareholders and depositors' interest are protected.
Image Credits © light_breeze2010.
1. Prudential Norms
The norms which are to be followed while investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders and depositors. Prudential Norms are generally prescribed and implemented by the central bank of the country. Commercial Banks have to follow these norms to protect the interests of the customers. For international banks, prudential norms were prescribed by the Bank for International Settlements popularly known as BIS. The BIS appointed a Basle Committee on Banking Supervision in 1988.
2. Basel Committee
Basel committee appointed by BIS formulated rules and regulation for effective supervision of the central banks. For this it, also prescribed international norms to be followed by the central banks. This committee prescribed Capital
Adequacy Norms in order to protect the interests of the customers.
3. Definition of Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) is defined as the ratio of bank's capital to its risk assets. Capital Adequacy Ratio
(CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).
Capital Adequacy Ratio (CAR) or Capital to Risk (Weighted) Assets
Ratio (CRAR) =
Tier-1 capital + Tier-2 capital/Risk weighted assets
India and Capital Adequacy Norms
The Government of India (GOI) appointed the Narasimham Committee in 1991 to suggest reforms in the financial sector. In the year 1992-93 the Narasimhan Committee submitted its first report and recommended that all the banks are required to have a minimum capital of 8% to the risk weighted assets of the banks. The ratio is known as
Along with profitability and safety, banks also give importance to Solvency. Solvency refers to the situation where assets are equal to or more than liabilities. A bank should select its assets in such a way that the shareholders and depositors' interest are protected.
Image Credits © light_breeze2010.
1. Prudential Norms
The norms which are to be followed while investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders and depositors. Prudential Norms are generally prescribed and implemented by the central bank of the country. Commercial Banks have to follow these norms to protect the interests of the customers. For international banks, prudential norms were prescribed by the Bank for International Settlements popularly known as BIS. The BIS appointed a Basle Committee on Banking Supervision in 1988.
2. Basel Committee
Basel committee appointed by BIS formulated rules and regulation for effective supervision of the central banks. For this it, also prescribed international norms to be followed by the central banks. This committee prescribed Capital
Adequacy Norms in order to protect the interests of the customers.
3. Definition of Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) is defined as the ratio of bank's capital to its risk assets. Capital Adequacy Ratio
(CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).
Capital Adequacy Ratio (CAR) or Capital to Risk (Weighted) Assets
Ratio (CRAR) =
Tier-1 capital + Tier-2 capital/Risk weighted assets
India and Capital Adequacy Norms
The Government of India (GOI) appointed the Narasimham Committee in 1991 to suggest reforms in the financial sector. In the year 1992-93 the Narasimhan Committee submitted its first report and recommended that all the banks are required to have a minimum capital of 8% to the risk weighted assets of the banks. The ratio is known as