Uploaded August 2026 | Updated September 2026, 3 weeks ago
RWA & Capital Adequacy Ratio explained — how banks manage loan risk in 2 steps. Crores
default, so why don't banks sink? 🔥
Everyone knows the names Vijay Mallya and Mehul Choksi. But India's biggest banking
losses don't come from a handful of famous defaulters — they come from crores of
ordinary borrowers who, for one reason or another, never repay. Banks already know
some customers will default. So how do they survive it? In two steps.
STEP 1 — RISK WEIGHTED ASSETS (RWA)
A bank doesn't treat every loan as equally risky. It assigns each one a risk weight:
- Lending to the government — 0% risk weight
- Credit card receivables — 150% for scheduled commercial banks
- Other categories carry different weights depending on loan type and loan-to-value
Add it all up and you get the bank's Risk Weighted Assets.
STEP 2 — CAPITAL ADEQUACY RATIO (CAR)
BIS (through the Basel norms) and the RBI both require a bank to hold a fixed
percentage of its RWA as its own capital:
- Basel minimum — 8%
- RBI's minimum CRAR in India — 9%
Example: on a ₹1 crore loan carrying a 100% risk weight, the bank must set aside
₹9 lakh of capital against it.
The principle is simple — the riskier the lending, the more capital the bank must keep
in its own pocket to absorb the loss. That's how credit risk, also called default risk,
is managed.
📌 WHAT CHANGES FROM 2027
The RBI notified the Capital Charge for Credit Risk (Standardised Approach) Directions,
2026 on 27 April 2026, effective 1 April 2027. Under the new framework, non-transactor
credit cards move from 150% to 125%, and "transactors" — cardholders who clear their
full balance every cycle — shift into the regulatory retail category. Know both the
current and the incoming position for the exam.
📌 Relevant for UPSC GS Paper 3 (Indian Economy — banking and monetary policy), and for
RBI Grade B, NABARD, SEBI and other banking exams.
#CapitalAdequacyRatio #RWA #CAR #Banking #RBI #UPSC #Economy #UPSCEconomy #BaselNorms
#IndianEconomy #UPSC2026 #IAS #BankingAwareness #Unacademy #CivilServices
capital adequacy ratio,capital adequacy ratio upsc,risk weighted assets,rwa banking,car full form banking,crar rbi,bank risk management,credit risk upsc,basel 3 india,bis basel norms,banking awareness upsc,economy for upsc,npa india,vijay mallya loan default,mehul choksi pnb scam,रिस्क वेटेड एसेट,कैपिटल एडिक्वेसी रेशियो,bank capital explained hindi,upsc economy 2026,rbi grade b economy
RWA & Capital Adequacy Ratio explained — how banks manage loan risk in 2 steps. Crores
default, so why don't banks sink? 🔥
Everyone knows the names Vijay Mallya and Mehul Choksi. But India's biggest banking
losses don't come from a handful of famous defaulters — they come from crores of
ordinary borrowers who, for one reason or another, never repay. Banks already know
some customers will default. So how do they survive it? In two steps.
STEP 1 — RISK WEIGHTED ASSETS (RWA)
A bank doesn't treat every loan as equally risky. It assigns each one a risk weight:
- Lending to the government — 0% risk weight
- Credit card receivables — 150% for scheduled commercial banks
- Other categories carry different weights depending on loan type and loan-to-value
Add it all up and you get the bank's Risk Weighted Assets.
STEP 2 — CAPITAL ADEQUACY RATIO (CAR)
BIS (through the Basel norms) and the RBI both require a bank to hold a fixed
percentage of its RWA as its own capital:
- Basel minimum — 8%
- RBI's minimum CRAR in India — 9%
Example: on a ₹1 crore loan carrying a 100% risk weight, the bank must set aside
₹9 lakh of capital against it.
The principle is simple — the riskier the lending, the more capital the bank must keep
in its own pocket to absorb the loss. That's how credit risk, also called default risk,
is managed.
📌 WHAT CHANGES FROM 2027
The RBI notified the Capital Charge for Credit Risk (Standardised Approach) Directions,
2026 on 27 April 2026, effective 1 April 2027. Under the new framework, non-transactor
credit cards move from 150% to 125%, and "transactors" — cardholders who clear their
full balance every cycle — shift into the regulatory retail category. Know both the
current and the incoming position for the exam.
📌 Relevant for UPSC GS Paper 3 (Indian Economy — banking and monetary policy), and for
RBI Grade B, NABARD, SEBI and other banking exams.
#CapitalAdequacyRatio #RWA #CAR #Banking #RBI #UPSC #Economy #UPSCEconomy #BaselNorms
#IndianEconomy #UPSC2026 #IAS #BankingAwareness #Unacademy #CivilServices
capital adequacy ratio,capital adequacy ratio upsc,risk weighted assets,rwa banking,car full form banking,crar rbi,bank risk management,credit risk upsc,basel 3 india,bis basel norms,banking awareness upsc,economy for upsc,npa india,vijay mallya loan default,mehul choksi pnb scam,रिस्क वेटेड एसेट,कैपिटल एडिक्वेसी रेशियो,bank capital explained hindi,upsc economy 2026,rbi grade b economy
