{"id":14407,"date":"2026-05-27T07:42:30","date_gmt":"2026-05-27T07:42:30","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/tier-2-capital\/"},"modified":"2026-05-27T07:42:30","modified_gmt":"2026-05-27T07:42:30","slug":"tier-2-capital","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/tier-2-capital\/","title":{"rendered":"Tier 2 Capital"},"content":{"rendered":"

Tier 2 Capital<\/a> is the supplementary capital of a bank that provides additional loss absorption capacity after Tier 1 Capital<\/a> is exhausted. It is less permanent and less loss-absorbing than Tier 1, and its inclusion in total capital is subject to limits set by regulators.<\/p>\n

What Is Tier 2 Capital?<\/h2>\n

Tier 2 Capital consists of:
\n– **Subordinated debt**: long-term bonds<\/a> that are junior to depositor claims and senior to equity<\/a>; typically with a minimum maturity of 5 years
\n– **Revaluation reserves**: unrealised gains on assets<\/a> (e.g., appreciation in value of fixed assets held)
\n– **General provisions**: provisions held against unidentified potential future losses
\n– **Hybrid capital instruments**: bonds that have some characteristics of both debt and equity<\/p>\n

Under Basel III, Tier 2 Capital can be at most 100% of Tier 1 Capital (so total capital = maximum 2x Tier 1).<\/p>\n

Tier 2 vs Tier 1 Capital<\/h2>\n

| Feature | Tier 1 | Tier 2 |
\n|———|——–|——–|
\n| Permanence | Permanent | Has maturity dates |
\n| Loss absorption | Goes concern basis | Gone concern basis |
\n| Seniority in liquidation | Junior (last to be paid) | Senior to equity but junior to depositors |
\n| RBI minimum | 6% of RWA | Supplementary |<\/p>\n

Tier 2 is “gone concern” capital: it absorbs losses primarily in liquidation (when the bank is being wound up), not while the bank is still operating.<\/p>\n

Subordinated Debt Bonds in India<\/h2>\n

Banks issue subordinated bonds (long-term infrastructure bonds or Tier 2 bonds<\/a>) to count toward Tier 2 Capital. These carry higher interest rates than senior bonds because they are junior in the payment hierarchy.<\/p>\n

Practical Example<\/h2>\n

A bank has:
\n– Tier 1 Capital: Rs 2,000 crore
\n– Subordinated bonds: Rs 1,000 crore
\n– Revaluation reserves (eligible portion): Rs 200 crore
\n– Total Tier 2 Capital: Rs 1,200 crore<\/p>\n

Under Basel III, Tier 2 is limited to Rs 2,000 crore (equal to Tier 1). The full Rs 1,200 crore is eligible. Total capital = Rs 3,200 crore.<\/p>\n

Key Takeaways<\/h2>\n

– Tier 2 Capital supplements Tier 1; consists of subordinated debt, revaluation reserves, and general provisions
\n– Less permanent and less loss-absorbing than Tier 1; classified as gone-concern capital
\n– Capped at 100% of Tier 1 Capital for inclusion in total capital calculation
\n– Subordinated bonds issued by banks to raise Tier 2 Capital carry higher yield<\/a>s but lower seniority than deposits
\n– Investors in bank subordinated bonds must understand they are at risk before depositors in a liquidation<\/p>\n","protected":false},"excerpt":{"rendered":"

Tier 2 Capital is the supplementary capital of a bank that provides additional loss absorption capacity after Tier 1 Capital is exhausted. It is less permanent and less loss-absorbing than Tier 1, and its inclusion in total capital is subject to limits set by regulators. What Is Tier 2 Capital? Tier 2 Capital consists of: […]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-14407","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Team Lemonn","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"Tier 2 Capital is the supplementary capital of a bank that provides additional loss absorption capacity after Tier 1 Capital is exhausted. It is less permanent and less loss-absorbing than Tier 1, and its inclusion in total capital is subject to limits set by regulators. What Is Tier 2 Capital? Tier 2 Capital consists of:…","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14407","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14407\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=14407"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}