Net Worth & Solvency Glossary · NBFC & RBI
Tier I capital is the core, permanent capital of a non-banking financial company (NBFC): the part of its own funds that the Reserve Bank of India treats as available to absorb losses while the company keeps operating.
It is the first and stronger layer of an NBFC's regulatory capital, ahead of Tier II.
Two layers of regulatory capital, and the separate figure a CA certifies.
both stand on
Labels only. Amounts, limits and ceilings come from the current RBI directions.
Inside Tier I
Tier I is defined by permanence and by the ability to absorb losses, not by label. In broad terms, it is built from the owners' permanent funds.
What everything inside Tier I has in common is that it does not have to be repaid and is there on a bad day.
The full list, from the Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025: owned fund (paid-up equity capital, preference shares compulsorily convertible into equity, free reserves, the share premium balance and capital reserves from surplus on the sale of assets, less accumulated losses, intangible assets and deferred revenue expenditure), reduced by investments in the shares of other NBFCs and investments in, loans and advances to and deposits with subsidiaries and group companies, to the extent these exceed 10% of owned fund in aggregate. A non-deposit-taking NBFC in the middle layer may add perpetual debt instruments within a limit. An upper-layer NBFC builds Tier I from common equity Tier I capital, compulsorily convertible preference shares and perpetual debt within the same limit.
Tier I and NOF
Tier I and net owned fund (NOF) start from much the same place, so they are often confused.
Both build on the NBFC's owned funds: paid-up capital and free reserves, less accumulated losses and intangible assets. The balance in the share premium account counts in both. They then go separate ways. How the owned-fund base differs from share capital alone is covered in Net Owned Fund vs Paid-Up Capital: Where They Differ.
The two deductions are close but not the same. For NOF, exposure to the group and to other NBFCs is cut above 10% of paid-up equity capital and free reserves; for Tier I, investments in other NBFCs' shares and in group and subsidiary companies are cut above 10% of owned fund. Tier I can also admit perpetual debt instruments within a limit.
An NBFC with a large owned-funds figure and heavy group exposure can certify a much smaller NOF than its balance sheet suggests. This is the figure a CA works to in a net owned fund certificate for an NBFC.
Instruments and layers
Some instruments are borrowings in form but capital in effect. A perpetual debt instrument has no maturity date and lets the issuer defer payment in defined circumstances, which is why regulators may allow it into core capital within a limit.
For a non-deposit-taking NBFC in the middle layer, perpetual debt instruments count in Tier I up to 15% of its aggregate Tier I as on 31 March of the previous financial year. A base-layer NBFC cannot include them.
The RBI regulates NBFCs in layers under its scale based regulation framework, and reporting and capital requirements differ between layers. An NBFC that moves between layers finds its obligations change with it, so the applicable layer is settled before anything is computed.
The minimums: an NBFC in the middle layer or above holds Tier I of at least 10% of risk-weighted assets within a CRAR of 15%; a base-layer NBFC lending mainly against gold jewellery holds 12% and 15%; an upper-layer NBFC also holds common equity Tier I of at least 9%.
Sources: Reserve Bank of India Act, 1934, section 45-IA (net owned fund), and the Reserve Bank's directions for NBFCs (Reserve Bank of India). Tier I itself is defined in the Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025. This entry describes Indian practice in general terms. The current RBI directions govern each NBFC.
Need help with a certificate that uses Tier I capital? See our Net Owned Fund Certificate for NBFCs.