Understanding Core Capital (Tier I Capital) According to NRB Guidelines

Core Capital, also known as Tier I Capital, is the primary component of a bank's financial strength and stability. It includes the most permanent and readily available capital to absorb losses. According to the Nepal Rastra Bank (NRB) guidelines, Tier I Capital generally consists of:

1. Paid-up Equity Capital: The total amount of capital raised by the bank from shareholders in exchange for shares of stock.

2. Share Premium: The amount received by the bank over and above the par value of its shares.

3. Non-redeemable Preference Shares: Preference shares that cannot be redeemed by the holder and are considered as part of equity capital.

4. General Reserves: Reserves set aside out of profits for future contingencies or as per regulatory requirements.

5. Retained Earnings: Profits retained in the business after dividends have been paid out.

6. Capital Redemption Reserve: A reserve created when a company buys back its shares out of distributable profits.

7. Other Free Reserves: Reserves available to the bank without any specific restriction for use.

NRB Formula for Core Capital

The NRB guidelines provide a detailed framework for calculating Core Capital (Tier I Capital). The general formula is as follows:

Core Capital(TierI)=Paid-up Equity Capital+Share Premium+Non-redeemable Preference Shares+General Reserves+Retained Earnings+Capital Redemption Reserve+ Other Free Reserves

Key Points

• Tier I Capital is critical for absorbing losses: It represents the most secure form of capital for banks, ensuring their ability to withstand financial stress.

• Regulatory Compliance: Banks are required to maintain a minimum percentage of Tier I Capital relative to their risk-weighted assets to ensure financial stability and compliance with regulatory standards.

Maintaining robust Core Capital is essential for the financial health and operational resilience of banks, providing a solid foundation for sustained growth and risk management.