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Capital funds: The capital funds would include the components Tier I capital and Tier II
capital.
Elements of Tier I Capital: The elements of Tier I capital includes:
(i) Paid-up capital (ordinary shares), statutory reserves, and other disclosed free
reserves, if any;
(ii) Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I
capital - subject to laws in force from time to time;
(iii) Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital;
and
(iv) Capital reserves representing surplus arising out of sale proceeds of assets.
Elements of Tier II Capital: The elements of Tier II capital include
Undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid
capital instruments, subordinated debt and investment reserve account.
(a) Undisclosed Reserves
They can be included in capital, if they represent accumulations of post-tax profits and
are not encumbered by any known liability and should not be routinely used for
absorbing normal loss or operating losses.
(b) Revaluation Reserves
It would be prudent to consider revaluation reserves at a discount of 55 per cent while
determining their value for inclusion in Tier II capital.
(c) General Provisions and Loss Reserves
General provisions/loss reserves will be admitted up to a maximum of 1.25 percent of
total risk weighted assets, whichever is lower, is taken
Excess provisions which arise on sale of NPAs would be eligible Tier II capital subject to
the overall ceiling of 1.25% of total Risk Weighted Assets.
e) Subordinated Debt
Banks can raise, with the approval of their Boards, rupee-subordinated debt as Tier II
capital.
Deductions from Tier I Capital: The following deductions should be made from Tier I
capital:
(a) Intangible assets and losses in the current period and those brought forward from
previous periods should be deducted from Tier I capital;
(b) Creation of deferred tax asset (DTA) results in an increase in Tier I capital of a bank
without any tangible asset being added to the banks balance sheet. Therefore, DTA,
which is an intangible asset, should be deducted from Tier I capital.
Note:
Tier-III capital is limited to 250% of Tier-I
28.5% of market risk needs to be supported by Tier-I
Minimum requirement of Capital Funds
Banks are required to maintain a minimum CRAR of 9 per cent on an ongoing basis.
Common capital Ratio:
Tier-I capital- 6%
Tier-II Capital- 3%
: 100%
: 100%
: 25%
: 40%
: 15%
Substandard (Unsecured)
: 25%
Infrastructure Loan
:20%
: 0.25%
: 1%
: 2%
Restructured Advances
: 2.75%
: 0.40%
Revenue Expenses
-----------------------------------------Assets
ROE =
Revenue Expenses
-----------------------------------------Equity
ROC =
Revenue Expenses
-----------------------------------------Capital