1 What is Capital Adequacy Ratio
The capital adequacy ratio (CAR) is a measure of a bank's capital in relation to its risk. It is used to assess the bank's financial stability and ability to absorb potential losses, such as those that might arise from loan defaults or other unexpected events. The CAR is typically expressed as a percentage and is calculated by dividing a bank's capital by its risk-weighted assets.
Banks are required to maintain a minimum level of CAR, as set by regulatory authorities, in order to ensure that they have sufficient capital to cover their risks and support their operations. The higher the CAR, the more capital a bank has relative to its risk, which can indicate a stronger financial position. However, it is important to note that the CAR is only one aspect of a bank's financial health, and other factors should also be considered when evaluating the bank's overall strength.
2 Capital to Risk Asset Ratio
The capital to risk-weighted assets ratio (CRAR) is a measure of a bank's capital in relation to its risk-weighted assets. It is used to assess the bank's financial stability and ability to absorb potential losses, such as those that might arise from loan defaults or other unexpected events. The CRAR is typically expressed as a percentage and is calculated by dividing a bank's capital by its risk-weighted assets.
Banks are required to maintain a minimum level of CRAR, as set by regulatory authorities, in order to ensure that they have sufficient capital to cover their risks and support their operations. The higher the CRAR, the more capital a bank has relative to its risk-weighted assets, which can indicate a stronger financial position. However, it is important to note that the CRAR is only one aspect of a bank's financial health, and other factors should also be considered when evaluating the bank's overall strength.
3 Marginal Cost of Funds Based Lending Rate (MCLR)
The Marginal Cost of Funds Based Lending Rate (MCLR) is the minimum interest rate that a bank is allowed to charge on loans. It is calculated based on the marginal cost of borrowing funds for the bank, which includes the cost of its deposits and borrowings, as well as its operational costs. The MCLR is used as a benchmark for setting the interest rates on various types of loans offered by the bank, such as home loans, personal loans, and business loans.
The MCLR is reviewed and revised by banks on a monthly basis, based on changes in the cost of funds and other factors. It is generally lower than the base rate (the minimum lending rate fixed by the Reserve Bank of India), and can be used as a reference point for comparing the interest rates offered by different banks. Borrowers can use the MCLR to compare the rates offered by different banks and choose a loan with a lower interest rate, which can result in lower monthly payments and lower overall borrowing costs.