Capital Adequacy Ratio (CAR), also known as Capital to Risk-weighted Assets Ratio (CRAR), is the key regulatory metric measuring a bank's financial strength — representing the ratio of a bank's eligible capital (Tier 1 and Tier 2 capital) to its total risk-weighted assets (RWA). It is calculated as: CAR = (Tier 1 Capital + Tier 2 Capital) ÷ Risk-Weighted Assets × 100. The RBI requires Indian scheduled commercial banks to maintain a minimum CAR of 9% (above the global Basel III minimum of 8%), with an additional Capital Conservation Buffer of 2.5% — making the effective minimum requirement 11.5% for most Indian banks. Tier 1 capital (the highest quality capital including equity and retained earnings) must be at least 7% of RWA. A higher CAR indicates a better-capitalised bank with a larger buffer to absorb unexpected losses without becoming insolvent. Banks with CAR significantly above the regulatory minimum — such as Indian private sector banks with CARs of 17% to 20% — have stronger capital buffers, greater loan growth capacity, and lower regulatory intervention risk. For Indian banking equity investors, CAR is a critical input in assessing the need for capital raising — a bank approaching minimum CAR thresholds may require a rights issue or QIP that dilutes existing shareholders, while well-capitalised banks can grow their loan books faster without equity dilution.
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