What are Tier I and Tier II Capital?
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.
- 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%