What is the Capital Adequacy Ratio (CAR)? Do you think our banks are maintaining CAR as per Bangladesh Bank requirements?

 Capital Adequacy Ratio is also known as Capital to Risk Assets Ratio, It is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and comply with statutory Capital requirements. It is a measure of a bank's capital.

 ·        The Capital Adequacy Ratio (CAR) helps make sure banks have enough capital to protect depositor’s money 

·        The formula for CAR is: (Tier 1 Capital + Tier 2 Capital)/Risk-Weighted Assets 

·        Capital requirements set by the BB have become stricter in recent years.

 A bank that has a good CAR has enough capital to absorb potential losses. Thus, it has less risk of becoming insolvent and losing depositors' money.

 Basically, the Banking sector in Bangladesh has maintained the lowest capital adequacy ratio (CAR) than other South Asian countries-India, Pakistan and Sri Lanka. The stability report says the capital adequacy ratio (CAR) of the banking industry stood at 11.6% at the end of December 2020, which was 10.5% a year earlier.

 The low capital adequacy ratio is the direct consequence of the banks' default loans as the banks had to keep their provisioning against default loans.

 According to the BB guidelines on risk-based capital adequacy, banks have to maintain a minimum capital adequacy ratio (CAR)-which is a bank's capital reserve to cover their risk exposure of 12.50% by 2020, in line with the BASEL III requirement.

The overall capital adequacy ratio (CAR) in the overall banking sector was not bad at all but the state-run banks and some new banks capital adequacy ratio was not good owing to their high amount of non-performing loans.

The reason minimum capital adequacy ratios (CARs) are critical is to make sure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors' funds. The capital adequacy ratios ensure the efficiency and stability of a nation's financial system by lowering the risk of banks becoming insolvent. Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations. Banks have to maintain CAR on a solo basis as well as on a consolidated basis as per instruction(s) given by BB from time to time. Banks can increase their regulatory capital ratios by either increasing their levels of regulatory capital (the numerator of the capital ratio) or by decreasing their levels of risk-weighted assets (the denominator of the capital ratio).