How do you read Capital adequacy ratio (CAR)?

RBI requires banks to hold at least 11.5% including the buffer, and NBFCs 15%. A few points above the minimum is comfortable. On the scale used here, below 12% reads as near the floor, 12% to 15% reads as adequate, and 15% and above reads as well capitalised. Higher is usually better.

Capital adequacy ratio (CAR), explained

What is Capital adequacy ratio (CAR)?

A lender's capital as a share of its loans and other assets, after weighting each asset by how risky it is. Also called CRAR.

Not every asset is equally risky, so each is given a weight: a government bond counts for nothing, a home loan for a fraction of its value and an unsecured personal loan for more than its value. Capital is then measured against that risk-weighted total rather than against the raw balance sheet.

Capital is what stands between a lender's losses and its depositors. A lender close to the regulatory minimum must slow its lending or raise new shares, usually at a poor price, so the ratio also tells you how much room it has to grow.

How it is calculated

CAR = (Tier 1 capital + Tier 2 capital) ÷ risk-weighted assets, as a percentage.

A worked example

Capital of ₹16,000 Cr against risk-weighted assets of ₹1,00,000 Cr: CAR = 16%.

Why does Capital adequacy ratio (CAR) matter?

It is the regulator's test of whether a lender can absorb losses and still repay depositors. A lender short of capital cannot grow.

What is a good Capital adequacy ratio (CAR)?

RBI requires banks to hold at least 11.5% including the buffer, and NBFCs 15%. A few points above the minimum is comfortable.

Indian banks must keep 9% plus a 2.5% capital conservation buffer; the largest banks carry a further surcharge. A bank at 15% to 18% has room to grow for several years. Higher is safer but not free: capital sitting idle lowers return on equity.

Reading scale

In %

Near the floor

Adequate

Well capitalised

9%12%15%20%+

On the scale used here, below 12% reads as near the floor, 12% to 15% reads as adequate, and 15% and above reads as well capitalised.

Higher is usually better.

What are the common mistakes with Capital adequacy ratio (CAR)?

Looking only at the total. The quality matters; check CET1, the part made of pure equity.

Assuming a high ratio means a good bank. It can also mean the bank is not finding loans worth making.

Is this lender sound, and does it earn enough for the risk it takes?

A bank's raw material is other people's money, so the ratios that judge a factory misread it. These are the figures that matter for banks, NBFCs and housing finance companies: what they earn on lending, how many loans have gone bad, how well they are cushioned against losses, and how cheaply they fund themselves.