Solution

As a matter of prudence, RBI has stipulated that scheduled commercial banks operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e., capital to risk weighted assets (CRAR). This will be further divided into different components                       I.        Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs) i.e., for credit risk + market risk + operational risk on an ongoing basis.                     II.        Tier 1 capital must be at least 7% of RWAs on an ongoing basis. Thus, within the minimum Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs.                    III.        Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%.                           IV.        If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios,then the excess Additional Tier 1 capital can be admitted for compliance with the minimum CRAR of 9% of RWAs.                     V.        In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs6 in the form of Common Equity Tier 1 capital