Capital Adequacy Ratio (CAR) is a measure of a bank’s financial strength and its ability to absorb potential losses arising from its lending and investment activities. It is calculated by dividing a bank’s capital by its risk-weighted assets.

Capital refers to the funds that a bank has available to cover losses or to invest in business growth. The capital of a bank includes its shareholders’ equity, reserves, and other forms of equity.

Risk-weighted assets are a bank’s assets that are adjusted for their level of risk. For example, loans to individuals or companies with a higher credit rating are considered less risky and are assigned a lower risk weight, while loans to individuals or companies with a lower credit rating are considered more risky and are assigned a higher risk weight.

A higher Capital Adequacy Ratio indicates that a bank has a stronger financial position and is better able to absorb potential losses. Banks are required to maintain a minimum Capital Adequacy Ratio, as set by the regulatory authorities in each country, to ensure that they have sufficient capital to operate safely and protect depositors’ funds.