UGC NET COMMERCE November 2017(Paper-II) Q42
- Option : C
- Explanation : Capital Adequacy Norms: Bank’s capital is vital as it is the lifeblood that keeps the bank alive; it also gives the bank the ability to absorb shocks and thereby, avoid the likelihood of bankruptcy. Capital adequacy ratio is a measure of the amount of a bank’s capital expressed as a percentage of its risk-weighted credit exposures.
The concept of capital adequacy ratio relates to risk weight assigned to an asset raised by the banks in the process of conducting business and to the proportion of capital to be maintained on such aggregate risk-weighted assets. Capital adequacy ratio is calculated on the basis of risk weightages on assets in the books of banks. Each business transaction carries a specific risk and a portion of capital has to be earmarked for this risk. This portion acts as a ‘secret reserve’ to cushion any possible future loss. Higher capital adequacy will drive banks towards greater efficiency and this could force banks to bring down operating costs. Capital adequacy enables banks to expand their balance sheet and strengthen their fundamentals, which, in turn, help the banks to mobilise capital at reasonable cost. Hence, quality and risk weightage of assets are the new important parameters which are crucial for the growth of banks.
