Page 43 - Banking Finance September 2023

ARTICLE

Composition of Regulatory Capital Reserve Bank from time to time for inclusion in Tier 2
capital.
As per the guidelines issued by Reserve Bank of India, Banks
have been directed to maintain a pillar 1 Capital to Risk (vii) Less: Regulatory adjustments / deductions applied in the
weighted Assets Ratio (CRAR) of 9% ( excluding capital calculation of Tier 2 capital
conservation buffer).
The capital requirements are illustrated as
Components of Capital follows:
Capital of the bank can be divided into following two
Sr No Regulatory Capital % of RWA
categories:
(i) Common Equity Tier 1 Ratio 5.5
(i) Tier 1 Capital
(ii) Additional Tier 1 Capital 1.5
(ii) Tier 2 Capital
(iii) Minimum Tier 1 Capital Ratio 7.00
Tier 1 Capital: (iv) Tier 2 Capital 2.00
Tier 1 Capital of the bankconsists of Common Equity Tier 1 (v) Minimum Total Capital Ratio 9.00
and Additional Tier 1 Capital. Reserve Bank of India has
(vi) Capital Conservation Buffer 2.50
instructed to maintain at least 7.00 % of Risk weighted
(comprised of Common Equity)
Assets.
(vii) Minimum Total Capital Ratio 11.50
plus Capital Conservation Buffer
Elements of Tier 1 Capital
I. Paid-up capital (ordinary shares), statutory reserves, and
Process for Management of Capital:
other disclosed free reserves,
As we are aware that banking is capital intensive sector, for
II. Perpetual Non-cumulative Preference Shares (PNCPS)
every rupee of fresh advance we need to reserve a certain
eligible for inclusion as Tier I capital
share of our capital due to regulatory requirements. These
III. Perpetual Debt Instruments (PDI) eligible for inclusion regulatory requirements make it necessary to manage our
as Tier I capital; and capital more efficiently.
IV. Capital reserves representing surplus arising out of sale
proceeds of assets. For conservation of capital, we have designed six step
process for management of capital.
Tier 2 Capital:
Tier 2 Capital is consisting of General Provisions, borrowings
in foreign currency, revaluation reserves. Banks are directed
to maintain at least 2.00% of Risk weighted assets.
Following are the items considered under Tier2 Capital:
(i) General Provisions and Loss Reserves
(ii) Debt Capital Instruments issued by the banks.
(iii) Preference Share Capital Instruments [Perpetual
Cumulative Preference Shares (PCPS) / Redeemable Non-
Cumulative Preference Shares (RNCPS) / Redeemable
Cumulative Preference Shares (RCPS)] issued by the
banks.
(iv) Stock surplus (share premium) resulting from the issue
of instruments included in Tier 2 capital.

(v) Revaluation reserves at a discount of 55%
(vi) Any other type of instrument generally notified by the

BANKING FINANCE | SEPTEMBER | 2023 | 43