Tier I Capital
The core layer of the top line.
Read the definitionNet Worth & Solvency Glossary · NBFC & RBI
Capital to Risk-weighted Assets Ratio (CRAR) for NBFCs
noun · abbreviated "CRAR"; also called the capital adequacy ratio; a percentage, not a rupee figure
Definition
The capital to risk-weighted assets ratio (CRAR) measures a lender's regulatory capital against its assets after each asset has been weighted for its risk. It is expressed as a percentage.
For a non-banking financial company (NBFC), it shows whether the capital held is adequate for the risk in the lending book, not just for the book's size.
The shape of the ratio
Tier I capitalthe core capital
Tier II capitalthe supplementary capital
Risk-weighted assets
- each asset multiplied by a weight for its risk
- a low-risk asset counts for little; an unsecured loan counts in full
- off-balance-sheet exposures converted and included
= CRAR a percentage, read against the minimum the Reserve Bank of India sets for the NBFC's category
How it is built
01How CRAR weighs capital against risk-weighted exposure
CRAR is a fraction. What goes on each line decides everything the ratio says.
The top line
Capital as the regulator defines it
Counted in tiers: Tier I, the core capital, and Tier II, the supplementary capital.
The bottom line
Risk-weighted assets, not the balance sheet total
Each asset is multiplied by a weight that reflects its risk, so a low-risk asset counts for little and an unsecured loan counts in full. Off-balance-sheet exposures are converted and included.
Weighting is the whole idea
Dividing one line by the other gives the ratio. Two NBFCs with the same capital and balance sheets of the same size can report very different ratios.
Lends against strong security
Lends unsecured
Capital held
Same
Same
Balance sheet size
Same
Same
Risk-weighted assets
Lower
Higher
CRAR
Higher
Lower
Same capital, same size, different ratio: the weights did that, not the lending volume.
It also moves
Lending grows, so risk-weighted assets grow
CRAR falls, unless capital grows too
When people search for CRAR for NBFC
or CRAR ratio
, they mean this measure as the Reserve Bank of India applies it to NBFCs.
Two tests, not one
02Where CRAR reporting and net owned fund certification part ways
CRAR and net owned fund (NOF) share some inputs, but they are separate tests, and confusing them causes real errors.
Net owned fund NOF
- Measured as
- An absolute rupee figure.
- Starts from
- Owned funds, with the prescribed deductions applied.
- Measured against
- A minimum amount.
- Who and when
- A CA certifies it at a date.
Capital to risk-weighted assets ratio CRAR
- Measured as
- A percentage.
- Starts from
- Capital in tiers, weighed against the whole risk-weighted book.
- Measured against
- A minimum ratio.
- Who and when
- Reported periodically.
An NBFC can clear its NOF minimum comfortably while sitting close to its CRAR floor, or the reverse. A net owned fund certificate for an NBFC speaks to the NOF test. It should not be read as confirming capital adequacy. A worked guide shows how net owned fund is calculated, and Net Owned Fund vs Paid-Up Capital: Where They Differ separates it from share capital.
A different measure, not a smaller version of the same one. A reader given one when they asked for the other has been given a different measure. An NOF certificate answers "is the owned base above the minimum amount?"; CRAR answers "is the capital enough for the risk in the book?"
Detail and source
03The minimum CRAR and Tier II ceiling RBI applies to NBFCs
The Reserve Bank of India sets capital adequacy minimums in its capital adequacy directions for the NBFCs those directions cover, with separate requirements for the Tier I and Tier II layers.
What the current direction sets
Under the Reserve Bank of India (Non-Banking Financial Companies - Prudential Norms on Capital Adequacy) Directions, 2025, an NBFC in the Middle Layer and above keeps a CRAR of at least 15 per cent and Tier I capital of at least 10 per cent of its risk-weighted assets. An NBFC lending mainly against gold jewellery keeps CRAR at 15 per cent and Tier I at 12 per cent. Tier II capital may never exceed Tier I capital, and an Upper Layer NBFC also keeps Common Equity Tier I capital of at least 9 per cent.
Read it from the current direction. The figure that applies to a particular company is read from the current RBI direction for its category, not from memory or from an older circular.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
Sources: the Reserve Bank of India's capital adequacy directions for NBFCs (Reserve Bank of India). This entry describes Indian practice in general terms. The current RBI direction governs each NBFC.
Need help with a certificate that uses capital to risk-weighted assets ratio? See our Net Owned Fund Certificate for NBFCs.