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.

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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Comments

  • jyoti
    Reply

    how a lowere CAR increases the cost of resourse??

    • Tuhin

      lower CAR means more money can be lent to castomers. So more money in market. Inflation is the effect.

    • sakthivel

      The value of the resources are always fixed when the CAR increases PPP value increase gradually.example if a car cost 5 lac when we approach bank for loan they gave loan with heavy interest.

  • saugata
    Reply

    Why do the Banks has to maintain Tier-I capital ratio at 8% ? and how the lower CAR increases the cost of resources?

  • Gaurav Dobhal
    Reply

    As we study that CAR = Capital/risk
    if CAR is low means risk is high. And if risk in production is high then it will definitely affect the resources

  • Gaurav Dobhal
    Reply

    As per Basel I suggestions Assets of banks are catagorised on the basis of the credit risk or the risk weightage of assets from 0% risk weightage to 100 and more than 100%. 0% refers to sovereign capital or the Govt capital where more than 100% refers to corporate sector. So according to Basel I banks having international presence have to hold atleast 8% to cover their risk and the risk as calculated as per the different catagories mentioned above

  • shmare
    Reply

    Please explain Tier 1 and Tier 2 in simple language ????

    Sir , Need help badly .

    • anurag

      Two types of capital are measured – tier one capital which can absorb losses without a bank
      being required to cease trading, e.g. ordinary share capital, and tier two capital which can
      absorb losses in the event of a winding-up and so provides a lesser degree of protection to
      depositors, e.g. subordinated debt

  • Dev
    Reply

    Please explain tier-I and tier-II in simple language.???

  • ava
    Reply

    From Wikipedia,

    Tier I Capital : core capital, which consists primarily of common stock (equity share) and disclosed reserves (or retained earnings) and other items as explained in the article.

    Tier II Capital : supplement capital, which consists elements as explained in the article.

  • Thuydung
    Reply

    Can anyone can help me explain what is the difference between the tier 1 and tier 2, pls ???

  • nitin
    Reply

    please explain tier 1 and tier 2 capital in simple language with examples.