In the Indian context, capital adequacy refers to the amount of capital that banks and financial institutions must maintain to cover potential losses arising from their lending and investment activities. Capital adequacy is an important aspect of banking regulation in India and is regulated by the Reserve Bank of India (RBI), the country’s central bank.

The RBI has prescribed a capital adequacy framework for banks in India based on the Basel III norms. Under this framework, banks are required to maintain a minimum capital adequacy ratio (CAR) of 11.5%, of which a minimum of 9.5% must be in the form of Tier 1 capital. Tier 1 capital includes equity capital and disclosed reserves, while Tier 2 capital includes subordinated debt and other hybrid instruments.

The RBI’s capital adequacy framework is aimed at ensuring that banks have sufficient capital to absorb losses and maintain their solvency in the event of adverse economic conditions. The framework takes into account the risk profile of banks’ assets and assigns risk weights to different categories of assets based on their credit risk. Banks with higher risk assets are required to maintain higher levels of capital to cover potential losses.

The RBI regularly monitors banks’ capital adequacy ratios and takes corrective action if necessary to ensure that banks comply with the minimum requirements. In addition to the minimum regulatory requirements, banks are also encouraged to maintain higher levels of capital to enhance their financial strength and resilience.