Tier 2 Capital

A bank's capital is layered like a building's safety system. The strongest, first-line cushion is Tier 1; the back-up reserve is Tier 2 capital. Under the RBI's Basel III framework, Tier 2 is the supplementary capital that absorbs losses primarily when a bank fails — making it 'gone-concern' capital, as opposed to Tier 1 'going-concern' capital that absorbs losses while the bank keeps operating.

What Counts as Tier 2

Tier 2 capital mainly comprises subordinated debt with a minimum maturity (bonds that rank below depositors and senior creditors in repayment), certain general provisions and loan-loss reserves up to a limit, and revaluation reserves at a discount. Because these instruments rank low in the repayment queue and can absorb losses in a wind-up, regulators count them as capital — but they're considered lower quality than equity, which is why Basel norms cap how much Tier 2 a bank can rely on.

Where It Fits in the Capital Stack

Total regulatory capital = Tier 1 (Common Equity Tier 1 + Additional Tier 1) plus Tier 2. Indian banks must maintain a minimum total Capital Adequacy Ratio (CRAR) of 9% under RBI rules (above the 8% Basel minimum), plus a capital conservation buffer, with Tier 2 making up the outer layer. By issuing Tier 2 subordinated bonds, a bank can boost its total capital ratio without diluting shareholders through fresh equity.

Why Investors Should Care

Tier 2 bonds are a real fixed-income instrument in India — banks and NBFCs raise Tier 2 sub-debt that retail and institutional investors buy for higher yields. The catch is the risk: these bonds rank below ordinary deposits and senior debt, and in a resolution they can take losses before senior creditors. So the extra yield compensates for genuine subordination risk. For bank-stock analysts, the *mix* of capital matters — a bank leaning heavily on Tier 2 and AT1 rather than core equity has a thinner true cushion. Reading a bank's CRAR breakdown reveals how solid its safety net really is.