What is Capital Adequacy Ratio – CAR?

The capital adequacy ratio (CAR) is a measurement of a bank's available capital

expressed as a percentage of a bank's risk-weighted credit
exposures.
The capital adequacy ratio, also known as capital-to-risk weighted assets ratio
(CRAR), is used
to protect depositors,
promote the stability and
efficiency of financial systems around the world.
Two types of capital are measured:
tier-1 capital, which can absorb losses without a bank being required to cease
trading, and
tier-2 capital, which can absorb losses in the event of a winding-up and so provides a
lesser degree of protection to depositors.
Calculating CAR

The capital adequacy ratio is calculated by dividing a bank's capital by its risk-
weighted assets. The capital used to calculate the capital adequacy ratio is divided
into two tiers.

CAR =
{Tier~1~Capital + Tier~2~Capital}/{Risk~Weighted~Assets}
Tier-1 Capital

Tier-1 capital, or core capital,

 consists of equity capital,

 ordinary share capital,
 intangible assets and
 audited revenue reserves.
Tier-1 capital is used to absorb losses and does not require a bank to cease
operations.
Tier-1 capital is the capital that is permanently and easily available to cushion losses
suffered by a bank without it being required to stop operating. A good example of a
bank’s tier one capital is its ordinary share capital.
Tier-2 Capital

Tier-2 capital comprises unaudited retained earnings, unaudited reserves and

general loss reserves. This capital absorbs losses in the event of a company winding
up or liquidating.
Tier-2 capital is the one that cushions losses in case the bank is winding up, so it
provides a lesser degree of protection to depositors and creditors. It is used to
absorb losses if a bank loses all its Tier-1 capital.
The two capital tiers are added together and divided by risk-weighted assets to
calculate a bank's capital adequacy ratio.
Risk-weighted assets are calculated by looking at a bank's loans, evaluating the risk
and then assigning a weight. When measuring credit exposures, adjustments are
made to the value of assets listed on a lender’s balance sheet.
KEY TAKEAWAYS
CAR is critical to ensure that banks have enough cushion to absorb a reasonable amount
of losses before they become insolvent.
CAR is used by regulators to determine capital adequacy for banks and to run stress tests.
Two types of capital are measured with CAR.
The first, tier-1 capital, can absorb a reasonable amount of loss without forcing the bank
to cease its trading.
The second type, tier-2 capital, can sustain a loss in the event of a liquidation. Tier-2
capital provides less protection to its depositors.

DEPOSITS AND NON DEPOSITS SOURCES

Deposits
Meaning : It is a sum of money paid into a bank (or) building society account
Parameters to determine the fund mobilization
 Maturity
 Cost of funds
 Tax implications
 Regulatory Framework
 Market conditions

Sources of deposits

Parameters

 Type of deposit customers

 Tenure of deposits
  Cost of banks

Classification of deposits

1.Transaction deposits/payment deposits

 These deposits are repayable by the bank on demand from the depositors.
 interest bearing deposits(individual & saving a/c)
 Non interest bearing deposits(low rate of interest)

2.Term deposits:

The customers receives a stream of cash flows in the form of interest. These deposits typically the
high rate of interest.

Example: certificate of deposit

USA –MMDA(Money market deposit accounts)

DDA(Demand deposit accounts)

UK- Saving deposits

Canada- term deposits,saving accounts

Non deposit sources/whole sale funding sources

Funding gap:

It is calculated as the difference between current and projected credit and deposit flows.

If the difference shows the projected need for credit exceeding the expected deposit flows, the bank
has to raise additional resources either from deposit or non deposit sources.

If the difference shows the projected credit requirements falling short of resources the bank will
have to find profitable investment avenues for the surplus resources.

Alternative funding sources

 Central bank funds

 Certificate on deposits(cd)
 Foreign funds
 Other money market funds

Types of non deposit sources

 Call & notice money

 External commercial borrowings(ECB)
 Export refinance

1.Call & notice money

 it is a money market instrument

 Money market is a market for short term financial assets.

Features

 Banking &all co-op banks

  Outstanding borrowing should not exceeding 100% of banks capital
 Non banking institutions cannot operate.

2.External commercial borrowings:

Commercial loan in the form of bank loan,buyers credit,suppliers credit,fixed rate of bonds

taken from non resident lenders with a minimum maturity period of 3years

Features

 Do not get approval from RBI& GOI

 Amount of maturity
 End use permitted
 Prepayment of ECB
 Security

3.Export refinancing from RBI

offer Refinancing for credit

Ex: SIDBI