What is capital adequacy ratio ?
Capital Adequacy Ratio is the measure of bank’s capital. In a bank, depositors fund are given higher priority at all times. At the case of winding up, depositor’s money are returned before shareholder’s money. Depositors only loose the money if the loss born by the bank is higher than the bank’s capital. Thus, higher the capital, higher the degree of safety. It is calculated as a percentage of bank’s risk weighted credit exposure. Hence, this ratio is referred as called “Capital fund to RWA”
Capital Adequacy Ratio (CAR) is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. Chiefly, this ratio is used to secure depositors and foster stability and efficiency of financial system all around the world. CAR is a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. In contest of Nepal, Nepal Rastra bank is the banking regulator.
As per NRB, commercial banks has to maintain capital adequacy ratio (CAR) as 11%. Because of this provision, most banks are currently maintaining minimum total capital ratio of 11 per cent. This means they need not worry about mobilizing additional funds. However, any bank having a capital adequacy ratio below 11 percent needs to increase its capital either by issuing right, bonus or any other means.