Capital Adequacy Ratio measures the ability of a financial
institution to meet its requirements by comparing its capital to
its assets. Regulatory authorities monitor this ratio to see if any
financial institutions are at risk of failure.
When a bank borrows Rs. 100, it does not lend the whole Rs.
100. There are many rules and regulations, made by the RBI, owing
to which the bank has to also some part of the money in the
Government securities as well.
The CAR of private banks is generally high, usually above 15%.
On the other hand, the CAR number is low, as they just match the
minimum requirements stated by the RBI.
The higher the Capital Adequacy Ratio (CAR), the more the bank
is performing on the safer side.