Q. Consider the following statements regarding Capital Adequacy Ratio (CAR): 1.Capital Adequacy Ratio is the ratio of a bank’s total capital to its total credit exposure. 2.CAR is used to protect depositors’ interests and ensure the financial stability of banks by assessing their capacity to absorb potential losses. Which of the above statements is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: B
Notes:

Explanation:

  • CAR is not calculated on total credit exposure but on risk-weighted credit exposures. It is the ratio of a bank’s capital to its risk-weighted assets, not just total credit.
  • The purpose of CAR is to protect depositors and ensure financial system stability by making sure banks have enough capital to absorb losses.

Source: Indian Economy (Ramesh singh)

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