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Tier 1 An Tier 2 Capital

Tier I capital consists of paid up capital, reserves, and retained earnings. Tier II capital includes debt and long term loans. According to Basel II accords, banks must maintain a minimum total capital ratio of 8% to account for credit risk. However, the Reserve Bank of India stipulates a minimum of 9% for banks in India, with at least 6% consisting of Tier I capital. Most banks prefer to exceed this and hold a 12% capital ratio to reduce costs.

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91 views1 page

Tier 1 An Tier 2 Capital

Tier I capital consists of paid up capital, reserves, and retained earnings. Tier II capital includes debt and long term loans. According to Basel II accords, banks must maintain a minimum total capital ratio of 8% to account for credit risk. However, the Reserve Bank of India stipulates a minimum of 9% for banks in India, with at least 6% consisting of Tier I capital. Most banks prefer to exceed this and hold a 12% capital ratio to reduce costs.

Uploaded by

Arun kumar
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© © All Rights Reserved
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Articles of General Knowledge Today

What are Tier I and Tier II Capital?


2011-04-21 10:04:36 GKToday

The Basel-I defined two tiers of the Capital in the banks to provide a point of view to the regulators. The
Tier-I Capital is the core capital while the Tier-II capital can be said to be subordinate capitals. The
following info shows the 2 tiers of the Capital Fund under the Basel II.

Tier-I Capital
Paid up Capital
Statutory Reserves
Other disclosed free reserves
Capital Reserves which represent surplus arising out of the
sale proceeds of the assets.
Investment Fluctuation Reserves
Innovative Perpetual Debt Instruments (IPDIs)
Perpetual Noncumulative Preference Shares.

Minus:

Equity Investment in subsidiaries.


Intangible assets.
Losses (Current period + past carried forward)

Tier-II Capital
Undisclosed reserves and cumulative perpetual
preference shares.
Revaluation Reserves
General Provisions and loss reserves
Hybrid debt capital instruments such as bonds.
Long term unsecured loans
Debt Capital Instruments.
Redeemable cumulative Preference shares
Perpetual cumulative preference shares.

As per the Basel II accords, the banks have to maintain the Minimum Total CRAR of 8%. The RBI
stipulated 9% for India and within that the Tier Capital would be 6% (By 31.3.2010)
Most banks prefer to hold at least 12% CAR at all points of time because a lower CAR increases
their cost of resource

Please note that banks have to follow the following minimum requirements of Capital Fund:

Minimum Total CRAR (Basel II Recommendations) : 8%


Minimum Total CRAR (RBI Guidelines) : 9%
For New Private Sector Banks : 10%
The banks that undertake insurance business: 10%
Local Area Banks 15%
For dividend declaration by banks 9%

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