What is Capital Adequacy?
Capital Adequacy is the measure of a bank's capital against its risk-weighted assets, expressed as the Capital Adequacy Ratio (CAR). RBI prescribes minimum CAR under Basel III norms; banks below the threshold face prompt corrective action.
| Meaning | Capital Adequacy is the measure of a bank's capital against its risk-weighted assets, expressed as the Capital Adequacy Ratio (CAR). RBI prescribes minimum CAR under Basel III norms; banks below the threshold face prompt corrective action. |
|---|---|
| Category | Banking |
| Related Laws | Basel III; RBI Master Direction on Capital Adequacy |
| Who Uses It | Banks, RBI, depositors |
| Why It Matters | Capital constraints shape the bank's willingness to take haircuts. |
Capital Adequacy explained in plain English
A practitioner's view written for borrowers and advisors — not a textbook definition.
Capital Adequacy is the measure of a bank's capital against its risk-weighted assets, expressed as the Capital Adequacy Ratio (CAR). RBI prescribes minimum CAR under Basel III norms; banks below the threshold face prompt corrective action.
In practice, Capital Adequacy is used most often by banks, rbi, depositors. Each of them sees the term from a slightly different angle: borrowers care about protection and outcomes, lenders care about classification and recovery, regulators care about consistency and disclosure.
The legal anchor for Capital Adequacy is Basel III; RBI Master Direction on Capital Adequacy. RBI master directions, the SARFAESI Act 2002, the RDB Act 1993 and the IBC 2016 commonly interplay, depending on the loan size, security and stage of stress.
Why does it matter? Capital constraints shape the bank's willingness to take haircuts. For a stressed borrower, getting this concept right early often saves several months of penal interest, legal cost and credit-score damage.
A real example: Bank reports CAR of 14.5% against the regulatory minimum of 11.5%. The mechanics may look complex, but the underlying logic — the bank wants closure, the borrower wants a fair outcome — is straightforward once the right framework is in place.
If you are facing a situation involving Capital Adequacy, the safest first step is a structured case review with a senior ex-banker who has handled comparable matters across banks and ARCs in India.
Where you'll encounter Capital Adequacy
Whenever a loan moves from "Standard" to "stressed", Capital Adequacy is one of the words that starts appearing in notices, bank emails and lawyers' opinions.
Sanctioning committees, recovery teams and risk officers use Capital Adequacy to classify accounts, decide provisioning and approve resolution paths.
Capital Adequacy appears in pleadings, securitisation applications, OAs, Section 7/9 petitions and SARFAESI writs as part of the dispute record.
When stressed loans are sold to ARCs or special-situations investors, Capital Adequacy is used in term sheets, assignment agreements and due-diligence reports.