UPSC Prelims 2018 · GS Paper I
Question 16: Economy and Social Development
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 ?
AnswerUPSC’s answer is (a).
The Capital Adequacy Ratio is a bank's own capital expressed as a percentage of its risk-weighted assets. It is the cushion that absorbs losses, for example when borrowers fail to repay, and so protects depositors. It is not left to each bank: the RBI prescribes the minimum, following the Basel norms, and banks must keep at least that level. Remember: CAR is set by the regulator, and a higher CAR means a safer bank.
- 1. CAR is a bank's own capital held against risk-weighted assets to absorb losses.
- 2. The RBI prescribes the minimum under Basel norms; banks do not choose it.
How you could have got this
- If you were sure statement 1 is correct, (b) and (d) go: each of them leaves 1 out.
What you needed to know: CAR is a bank's own capital held against risk-weighted assets to absorb losses.
- Then, if you were sure statement 2 is not correct, (c) goes: it includes 2.
What you needed to know: The RBI prescribes the minimum under Basel norms; banks do not choose it.
Only (a) is left. This one needs every statement.
Which options go is worked out from UPSC’s key and the options, not by a model.
Why each option is right or wrong
- (a) Right: CAR is the own-funds cushion against loan losses, and the regulator sets it.
- (b) Wrong: the RBI, not each bank, prescribes the minimum CAR.
- (c) Wrong: statement 2 is false.
- (d) Wrong: statement 1 is correct.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2018, General Studies Paper I, Series A. The paper on upsc.gov.in.