The following mentioned line in the article might be incorrect, as per my limited understanding of the concepts.
"If the risk weight on a loan is 100%, the bank has to set aside a Rupee for each Rupee it lends out. If it’s 50%, it only needs to set aside a Rupee for every two Rupees it lends"
My Understanding is as follows:
How Does This Affect Capital Adequacy?
Banks don’t need to set aside 1 Rupee for every Rupee loaned. Instead, they set aside capital as a percentage of the risk-weighted assets (RWA).
Capital Requirement Formula:
Capital Required = Risk-Weighted Assets (RWA) × Capital Adequacy Ratio (CAR)
Where CAR is typically 9% (as per RBI norms for Indian banks).
1. Example with a 100% Risk Weight Loan
Suppose a bank gives out a Rs. 100 loan with a 100% risk weight.
The risk-weighted asset (RWA) remains Rs. 100.
If the CAR is 9%, the bank must set aside Rs. 9 of its capital—not Rs. 100.
We're talking about AI because ChatGPT burst into the scene in November 2022. If not, we'd not be talking about AI. Knowing this is important. When researchers and enginners in US were at, for years, probably decades -- they didn't know what is going to be the outcome. They kept tinkering at the edges. Then they cracked it.
Learning how to use calculus is not the same as discovering it.
For India to now play catch up, it's like ISRO achieving some milestones, when it is NASA cracking problems for the first time. The entire category of AI has been determined by US and, its close competitor in terms of capability, that is, China. We are simply not the scene and shouldn't waste any time thinking about how to play catch up.
It's the same thinking behind discussions that happen post Olympics every 4 years -- as to why we don't have medals. Oh! Talent, money, infrastructure. Oh so simple. But simple isn't easy. Just owning the guitar won't make you an Hendrix. We don't own a guitar in most fields that matter.
Hi Team,
The following mentioned line in the article might be incorrect, as per my limited understanding of the concepts.
"If the risk weight on a loan is 100%, the bank has to set aside a Rupee for each Rupee it lends out. If it’s 50%, it only needs to set aside a Rupee for every two Rupees it lends"
My Understanding is as follows:
How Does This Affect Capital Adequacy?
Banks don’t need to set aside 1 Rupee for every Rupee loaned. Instead, they set aside capital as a percentage of the risk-weighted assets (RWA).
Capital Requirement Formula:
Capital Required = Risk-Weighted Assets (RWA) × Capital Adequacy Ratio (CAR)
Where CAR is typically 9% (as per RBI norms for Indian banks).
1. Example with a 100% Risk Weight Loan
Suppose a bank gives out a Rs. 100 loan with a 100% risk weight.
The risk-weighted asset (RWA) remains Rs. 100.
If the CAR is 9%, the bank must set aside Rs. 9 of its capital—not Rs. 100.
2. Example with a 50% Risk Weight Loan
Suppose the loan has a 50% risk weight.
RWA = Rs. 50 (50% of Rs. 100 loaned).
Capital required = 9% of Rs. 50 = Rs. 4.5.
Correct me if I am wrong. Thank you!
You're absolutely right, this was an oversight from us. Thanks for pointing it out! We've corrected the post.
We're talking about AI because ChatGPT burst into the scene in November 2022. If not, we'd not be talking about AI. Knowing this is important. When researchers and enginners in US were at, for years, probably decades -- they didn't know what is going to be the outcome. They kept tinkering at the edges. Then they cracked it.
Learning how to use calculus is not the same as discovering it.
For India to now play catch up, it's like ISRO achieving some milestones, when it is NASA cracking problems for the first time. The entire category of AI has been determined by US and, its close competitor in terms of capability, that is, China. We are simply not the scene and shouldn't waste any time thinking about how to play catch up.
It's the same thinking behind discussions that happen post Olympics every 4 years -- as to why we don't have medals. Oh! Talent, money, infrastructure. Oh so simple. But simple isn't easy. Just owning the guitar won't make you an Hendrix. We don't own a guitar in most fields that matter.