Capital Adequacy Ratio (CAR):

The measure of a bank's capital and expressed in percentage term. In simple

terms, this capital is set aside by banks to protect depositors. A lower CAR
means a bank is prone to the risk of going burst in case of any crisis.
However, a very high CAR means, the bank is not doing enough business.
It is calculated according to the Basel Accords.
CAR is made up of Tier 1 capital (Going-concern capital) and Tier 2 capital
(Gone-concern capital) divided by risk weighted assets. Tier 2 is
supplementary capital which consists of undisclosed reserves, general loss
reserves, hybrid debt capital instruments and subordinated debts. Tier 2
capital is considered less reliable than Tier 1.

CAR
SBI
ICICI
HDFC

Mar-11
11.98
19.54
16.22

Mar-12
13.86
18.52
16.52

Mar-13
12.92
18.74
16.8

Mar-14
12.96
17.7
16.07

Mar-15
12.79
17.02
16.79

CAR
25
20
15
10
5
0
40603

40969

41334
SBI

ICICI

41699

42064

HDFC

At March 31, 2015, Basel III guidelines require the Bank to maintain a
minimum CAR of 9.0%. CAR between 10 and 20 is considered good.
Indian Banks have a CAR well above the prescribed minimum of 9%.

This shows that banks are capital healthy and investor protection is
more.
Compared to HDFC and ICICI, SBI has more sub-standard assets
because more loans are given to low-income people resulting in lower
CAR. Private Banks have low NPAs compared to public sector banks
and due to higher CAR, they have been able to recover fast in times of
recession.
Over the years, with a rise in non-performing assets exerting pressure
on their profitability, Indian banks capital adequacy ratio has fallen.
This shows that banks are eyeing growth and have become slightly
more aggressive increasing their high risk capital.
We have observed from the data that the decrease in CAR is mainly
because of decrease in Tier 2 capital ratio. For example, in last 2 years
in case of SBI, Tier 2 ratio decreased from 2.98 to 2.69 while tier 1 ratio
increased from 9.98 to 10.10 resulting in overall decrease from 12.96
to 12.79. Similarly, in ICICI, Tier 2 ratio decreased from 4.92 to 4.24
while Tier 1 ratio remained the same at 12.78 resulting in overall
decrease from 17.7 to 17.02. In HDFC, Tier 2 ratio decreased from 4.3
to 3.13 while Tier 1 ratio increased from 11.77 to 13.66 resulting in an
overall increase from 16.07 16.79.
In March 2015, RBI issued amendments on capital adequacy which can
increase the risk weight of banks further reducing their CAR. For
example, in case of ICICI, the risk weight of 1111% applicable earlier
for certain exposures was revised to 1250%.