UPSC CSE Prelims
Question 39
Consider the following statements :
- Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- CAR is decided by each individual bank.
Which of the statements given above is/are correct ?
View correct answer and explanation
Correct answer: A
Correct Option: A
Explanation: Capital Adequacy Ratio compares a bank’s eligible regulatory capital with its risk-weighted assets, providing a loss-absorption buffer. Minimum CAR is specified by regulators, not chosen entirely by each bank.
Statement/Pair-wise Analysis:
Statement/Item 1: Correct - CAR requires banks to maintain capital to absorb losses on risky assets and defaulting loans.
Statement/Item 2: Incorrect - RBI prudential rules and Basel standards govern minimum capital adequacy, not each bank independently.
Option-wise Analysis:
A: Correct - includes all and only the true statements/items.
B: Incorrect - includes incorrect statement/item 2; omits correct statement/item 1.
C: Incorrect - includes incorrect statement/item 2.
D: Incorrect - omits correct statement/item 1.