Discussion
Capital adequacy norm helps the banks
(i) For strengthening capital base of banks
(ii) For sanctioning more loan
Answer: C
Correct answer: (i) is correct but (ii) is incorrect
Statement (i) is correct: capital adequacy norms strengthen the capital base, requiring a bank to fund itself with more of its own capital relative to its risk-weighted assets, so that losses fall on shareholders before depositors.
Statement (ii) is incorrect, and inverts the effect. The norms limit lending rather than enabling more of it: a bank whose capital ratio is at the floor cannot expand risk-weighted assets without raising fresh capital. That constraint is the whole point - it prevents a bank from growing its balance sheet on depositors' money alone.
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