Basel III capital adequacy norms mandate minimum capital ratios for banks to absorb losses. Capital Risk-weighted Assets Ratio (CRAR) measures total capital against risk-weighted assets. Tier 1 capital includes equity and retained earnings (core capital). Tier 2 includes subordinated debt and revaluation reserves (supplementary capital). RBI implemented Basel III phases from 2013-2019. Indian banks must maintain 11.5% CRAR, 9.5% Tier 1, and 7% Common Equity Tier 1 ratios. These exceed global minimums to strengthen banking stability.

Basel III emerged post-2008 financial crisis to strengthen global banking resilience. For Indian banks, it's crucial because our banking system supports 60% of corporate financing unlike developed markets relying on capital markets. CRAR acts as a buffer - higher ratios mean banks can absorb more losses before becoming insolvent. The risk-weighting mechanism is sophisticated: government bonds carry 0% risk weight while unsecured loans carry 100-150%. This incentivizes banks toward safer lending. Tier 1 capital represents permanent capital that absorbs losses while the bank operates. Common Equity Tier 1 is the highest quality - pure equity that can absorb losses immediately. Tier 2 provides secondary protection through subordinated instruments. RBI's conservative approach (ratios above Basel Committee minimums) reflects India's bank-dominated financial system where banking failures have severe economic spillovers. The phased implementation allowed banks to raise capital gradually rather than face sudden shocks. This framework directly impacts lending capacity, profitability, and systemic stability of Indian banking.