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CAR is Capital Adequacy Ratio. Capital provides cushion for absorption of losses. For banks, the capital is required to be calculated not in absolute terms but on the basis of riskiness of the assets that they carry on their books. Each asset class is given a risk-weight (prescribed by BIS) and the capital is required to be maintained at a certain percentage of the total risk-weighted assets.
Tier-I Capital comprises of permanent unencumbered funds readily available for absorption of losses. These include Paid-up Capital and free Reserves. Tier-II Capital, on the other hand, includes resources at the command of the the institution for a semi-permanent period of time. They may include items like subordinated debt, revaluation reserve, etc.
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