Under the Basel III capital standards implemented in India, what constitutes Tier 1 Capital for commercial banks?

💡 Solution & Explanation

Under Basel III norms, total Tier 1 Capital comprises Common Equity Tier 1 capital, which includes common shares and retained earnings, plus qualifying Additional Tier 1 instruments such as perpetual non-cumulative preference shares. This capital tier represents the highest quality loss-absorbing capital that ensures a bank remains a going concern during financial stress. Tier 2 capital, by contrast, includes subordinated debt and general loan-loss reserves serving gone-concern loss absorption. The Reserve Bank of India mandates strict compliance with these capital adequacy ratios.