Consider the following statements: 1) 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. 2) CAR is decided by each individual bank. Which of the statements given above is/are correct?

Statement 1 is correct in substance. CAR, or Capital to Risk-weighted Assets Ratio, is the proportion of a bank's own funds (Tier I and Tier II capital) to its risk-weighted assets. That capital is the cushion that absorbs losses when borrowers default. The question's wording is loose: CAR is a ratio, not an absolute amount, but the idea is right.

Statement 2 is wrong. CAR is not set by each bank. Under Basel norms, adopted in India by the RBI, the regulator prescribes the minimum. Indian scheduled commercial banks must keep a minimum total CRAR of 9 per cent, and with the Basel III capital conservation buffer of 2.5 per cent the effective requirement is 11.5 per cent. A bank may hold more than the floor, but it cannot go below it.

Core concept: prudential regulation of banks, the Basel framework, and the RBI's role as regulator. For Mains, this links to the NPA crisis and the 2017-18 recapitalisation of public sector banks, where weak CAR was the trigger.

Trap: aspirants often assume a bank can fix its own CAR because it is 'its own capital'. The capital is the bank's, but the minimum level is the regulator's call.