Q. With reference to the Basel III framework for Public Sector Banks (PSBs) and Regional Rural Banks (RRBs) in India, consider the following statements:
1.Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its deposits, and a higher CAR indicates better protection for depositors.
2.Under Basel III, the Tier 1 Capital requirement, which includes Common Equity Tier 1 (CET1), is considered a more loss-absorbing form of capital than Tier 2 Capital.
3.While PSBs are mandated to comply with the Basel III norms, RRBs are allowed to adhere to the less stringent Basel II framework due to their lower capital base.
Which of the statements given above is/are correct?
Answer: B
Notes:
Explanation:
Statement 1: Incorrect. CAR is the ratio of a bank’s capital to its Risk-Weighted Assets (RWA), not its deposits. A higher CAR means the bank has more capital buffer relative to the risk it is taking.
Statement 2: Correct. Basel III distinguishes between Tier 1 (core) and Tier 2 (supplementary) capital. Tier 1 Capital (especially CET1) is the most loss-absorbing capital and must be maintained to cover unexpected losses while the bank remains a going concern.
Statement 3: Incorrect. The RBI has mandated that both PSBs and RRBs must comply with the Basel III capital adequacy framework. The implementation of Basel III for RRBs was phased, but compliance is mandatory, not an exemption to Basel II.
