Consider the following statements:

1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.

2. CAR is decided by each individual bank.

Which of the statements given above is/are correct?

The correct option is 1 only.

Detailed Explanation:

Statement 1 is correct: Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. It is maintained by banks to absorb a reasonable amount of loss and protects depositors and other lenders. In simple terms, it ensures that banks have enough capital on hand to offset potential losses incurred if account-holders or borrowers default on their loan dues.

Statement 2 is incorrect: The Capital Adequacy Ratio is not decided individually by each bank. Instead, minimum CAR standards are set internationally by the Basel Committee on Banking Supervision (under Basel Accords) and regulated locally by the central bank of each country (for example, the Reserve Bank of India in India). Individual banks are legally obligated to maintain CAR at or above the minimum thresholds mandated by the central bank.

Therefore, only statement 1 is correct.