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Capital – What Constitutes Tier 1 and Tier 2 – a Representative Sample

Capital – What Constitutes Tier 1 and Tier 2 – a Representative Sample

 

The Master Circular on Basel III Capital Regulations discusses the capital funds in two categories – capital funds for Indian banks and capital funds of foreign banks operating in India. The following table shows the components of the capital funds for Indian vis a vis foreign banks operating in India:

  Indian Banks Indian Banks
Tier I Capital Common Equity Tier I (CET 1)    
  Paid up equity capital (ordinary shares)19 Interest free funds from Head Office20
Share premium on issue of common shares  
Statutory reserves Statutory reserves kept in Indian books
Capital reserves representing surplus arising out of sale proceeds of assets Capital reserves representing surplus arising out of sale of assets in India held in a separate account and which is not eligible for repatriation so long as the bank functions in India
Other disclosed free reserves, if any Remittable surplus retained in Indian books which is not repatriable so long as the bank functions in India
Revaluation reserves with discount of 55% (with effect from 1st March 2015), subject to meeting conditions prescribed in RBI circular dated 1st March 2016 Revaluation reserves with discount of 55% (till 29th February 2016), subject to meeting conditions prescribed in RBI circular dated 1st March 2016
Foreign currency translation reserve arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 at a discount of 25%, subject to meeting conditions prescribed in RBI circular dated 1st March 2016 Foreign currency translation reserve arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 at a discount of 25%, subject to meeting conditions prescribed in RBI circular dated 1st March 2016
Balance in Profit & Loss Account at the end of the previous financial year Profits of current financial year on a quarterly basis provided the incremental provisions made for NPA at the end of any of the four quarters of the previous financial year have not deviated more than 25% from the average of the four quarters with certain adjustments given in the Master Circular  
  Interest free funds remitted from abroad for the purpose of acquisition of property and held in a separate account in Indian books provided they are non repatriable and have the ability to absorb losses regardless of their source
  Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital
Additional Tier I (AT 1) Perpetual non-cumulative preference shares21 Head office borrowings in foreign currency by foreign banks operating in India as per criteria22
  Share premium on instruments included in AT 1 capital  
  Debt Capital instruments including Perpetual Debt instruments23  
  Any other instrument notified by RBI from time to time Any other instrument notified by RBI from time to time
  Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital
Tier II Capital Revaluation reserves with discount of 55% (till 29th February 2016) Revaluation reserves with discount of 55% (till 29th February 2016)
  General provisions and loss reserves General provisions and loss reserves
  Debt Capital instruments24 Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt capital
  Perpetual Cumulative Preference Shares (PCPS)/ Redeemable Non- Cumulative Preference Shares (RNCPS) /Redeemable cumulative preference shares(RCPS)25 Perpetual Cumulative Preference Shares (PCPS)/ Redeemable Non- Cumulative Preference Shares (RNCPS)/ Redeemable cumulative preference shares (RCPS)26
  Premium on instruments included in Tier 2  
  Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital

 

In case of foreign banks operating in India, RBI’s Master Circular on Capital Adequacy also lays down certain additional provisions in respect of capital to be followed by such banks.

Capital instruments which no longer qualify as AT 1 capital or Tier 2 capital (e.g. IPDI and Tier 2 debt instruments with step-ups) will be phased out beginning January 1, 2013. Fixing the base at the nominal amount of such instruments outstanding on January 1, 2013, their recognition will be capped at 90% from January 1, 2013, with the cap reducing by 10% in each subsequent year. This cap will be applied to Additional Tier 1 and Tier 2 capital instruments separately and refers to the total amount of instruments outstanding which no longer meet the relevant entry criteria. The following chart graphically depicts the provisions relating to such instruments:

 

 

 

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