What are Tier I and Tier II Capital?

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 CapitalThe amount of capital, both equity and preference, paid up by the shareholders against the capital subscribed to by them. 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: EquityThe ownership interest in a company of holders of its common and preferred stock. Investment in subsidiaries. Intangible assetsAn item of value whose true worth is hard or almost impossible to determine such as goodwill reputation, patents and so on. . Losses (Current period + past carried forward)

Tier-II Capital

Undisclosed reserves and cumulative perpetual preference shares. Revaluation Reserves General Provisions and loss reserves HybridAny security which has the character of more than one type of security, including their derivatives. debt capital instruments such as bonds. Long term unsecured loans Debt Capital Instruments. Redeemable cumulative Preference sharesA type of preference shares on which dividend accumulates if not paid. All arrears of preference dividend have to be paid out before paying dividend ..... 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 dividendPayment made to shareholders, usually once or twice a year out of a company’s profit after tax. Dividend payments do not distribute the entire net ..... declaration by banks                 9%