Capital Adequacy (CRAR)CRAR
The bank's own capital measured against its risk-weighted assets — the cushion before depositors are touched.
Why you care
A bank runs almost entirely on other people's money, so the thin layer of its own capital is all that stands between a bad year and collapse. CRAR forces that cushion to be big enough — and it explains why the bank sometimes prefers safe secured loans over juicy unsecured ones.
Run the numbers
The same ₹1 cr lent unsecured ties up ~3× the capital of a home loan, because risk-weights differ (illustrative). India's minimum CRAR is ~11.5% including buffers. A bank near the limit must raise capital or slow risky lending.
Where this goes
CRAR is the brake on the leverage that powers ROE — it stops a bank chasing returns by stacking risk without a cushion. Risk-weights tie it to asset classification and loan type; the capital is the equity line on the balance sheet.
Why you care
The Capital to Risk-weighted Assets Ratio (CRAR) is the bank's own capital measured against its risk-weighted assets — the cushion that must be able to absorb losses before depositors' money is ever touched.
A bank runs almost entirely on other people's money, so the small layer of its own capital is the only thing standing between a bad year and collapse. CRAR is the rule that forces that cushion to be big enough. The clever part is "risk-weighted": not all loans are treated equally. A safe home loan needs far less capital backing than a risky unsecured loan, which is why banks actively manage their mix of lending to use capital efficiently. For credit staff, this explains why the bank sometimes prefers a pile of secured loans over a smaller pile of juicy unsecured ones — capital, not just yield, is in play.
Run the numbers
Two ₹1 crore loans and the capital they consume (illustrative Basel risk-weights):
| Loan | Risk weight | Risk-weighted asset | Capital needed (at ~11.5%) |
|---|---|---|---|
| Home loan (secured) | 35% | ₹35 lakh | ~₹4.0 lakh |
| Unsecured personal loan | 100%+ | ₹1 crore+ | ~₹11.5 lakh+ |
Same ₹1 crore lent, but the unsecured loan ties up nearly 3× the capital. So even if the personal loan earns a higher yield, it's a heavier user of the bank's scarcest resource — capital. India's minimum CRAR is ~11.5% (including buffers), above the global Basel minimum. A bank near the limit must either raise capital or slow risky lending.
Where this goes
CRAR is the brake on the leverage that powers ROE — it stops a bank chasing returns by stacking risk without a cushion. Risk-weights tie it directly to asset classification and loan type, and the capital itself is the equity line on the balance sheet.