Corporate Financial Reporting · NBFCs - Provisioning Norms, Accounting and Reporting

NBFC Capital Adequacy and Exposure Limits: CRAR Explained

Updated 11 October 2026

Capital adequacy for an NBFC means holding enough eligible capital against its risk-weighted assets. CRAR = (Tier I + Tier II) ÷ risk-weighted assets. Compute Tier I after deductions, cap Tier II, weight each asset, then compare with the minimum CRAR and Tier I ratio. Exposure limits cap lending and investment to one borrower or group.

Understand Prudential Norms: Capital Adequacy and Exposure Limits

An NBFC lends and invests, so it can suffer losses when borrowers default. Capital is the cushion that absorbs those losses. RBI therefore says: your capital must be at least a fixed percentage of the risk you carry. That percentage is the Capital to Risk-weighted Assets Ratio (CRAR).

Capital is split in two. Tier I is the permanent, loss-absorbing capital: paid-up equity, free reserves, securities premium and similar items, less deductions such as intangible assets and investments in shares of other NBFCs and group companies. Those investment deductions apply as per the RBI rule in force, which may be only the excess over a prescribed limit. If the question says to deduct them in full, deduct in full. Tier II is weaker capital: revaluation reserves (at a 55% discount under the RBI norms), general provisions and loss reserves not linked to identified assets (up to a limit), hybrid and subordinated debt. Tier II is capped at 100% of Tier I, so it can never exceed Tier I.

For NBFC-ICC (investment and credit companies) and similar loan and investment companies, RBI's norm is a minimum CRAR of 15%, with Tier I of at least 10% of risk-weighted assets. Other categories have different norms, and NBFCs in the Upper Layer have their own requirements. The figures given in the question prevail.

Risk is measured by risk-weighted assets (RWA). Each asset is multiplied by a risk weight. Cash and government securities carry nil weight. Most loans and other assets carry 100% unless the question says otherwise. Off-balance-sheet items are first converted to a credit equivalent, then weighted.

RBI also limits concentration. Exposure to one borrower or one group, by way of loans and investments, is capped as a percentage of capital (the base is Tier I or owned fund, depending on the rule in force). A leverage ceiling limits total outside liabilities as a multiple of owned funds. These limits stop an NBFC from putting too many eggs in one basket.

The exact percentages differ by NBFC category and regulatory layer under RBI's scale-based regulation, and RBI revises them. In the exam, use the figures given in the question. If none is given, state the rule you assume.

Key rules to remember

CRAR: CRAR = (Tier I capital + Tier II capital) ÷ Risk-weighted assets × 100; Compare with the minimum CRAR prescribed for the NBFC's category. For NBFC-ICC and similar loan and investment companies the norm is 15%. Other categories have different norms. If the question gives a figure, use that.
Tier I ratio: Tier I ratio = Tier I capital ÷ Risk-weighted assets × 100; A minimum Tier I ratio applies separately. For NBFC-ICC and similar loan and investment companies the norm is 10%. Other categories and layers can differ. If the question gives a figure, use that. Check both ratios.
Tier I capital: Tier I = Owned fund (paid-up equity + free reserves + securities premium etc.) − intangible assets − investments in shares of other NBFCs and group companies − other prescribed deductions; Deduct before computing the ratio. Do not deduct from Tier II. Investments in group companies and other NBFCs are deducted as per the RBI rule (which may cover only the excess over a prescribed limit). If the question says to deduct in full, deduct in full and state that assumption.
Tier II cap: Eligible Tier II ≤ 100% of Tier I; Any excess Tier II is ignored. Subordinated debt has its own sub-limit and is discounted as it nears maturity.
Revaluation reserve: Eligible amount = Revaluation reserve × (100% − discount). With a 55% discount, eligible amount = 45%; Under the RBI norms, revaluation reserves are counted at a 55% discount, because the value is not realised. If the question gives a different figure, the question's figure prevails.
General provisions: General provisions and loss reserves not attributable to identified assets: eligible for Tier II up to 1.25% of RWA; This limit applies only to general provisions and loss reserves that are not linked to identified impaired assets. It caps this one item. It is only a part of Tier II, which is also subject to the overall cap of 100% of Tier I. Provisions made against identified assets do not qualify under this item.
Risk-weighted assets: RWA = Σ (asset amount × risk weight) + credit equivalent of off-balance-sheet items × weight; Cash and government securities: 0%. Other assets: usually 100% unless stated.
Concentration check: Exposure limit = prescribed % × capital base; Excess = Exposure − Limit; Check single borrower and group limits separately. Exposure includes loans and investments as the rule specifies.

How to solve Prudential Norms: Capital Adequacy and Exposure Limits questions

Use this order for any CRAR or exposure question. It keeps every deduction and cap visible, which is where marks are given.

1List the capital items given and separate them into Tier I items and Tier II items.
2Compute owned fund, then subtract intangible assets, investments in shares of other NBFCs and group companies, and any other stated deductions. This is Tier I.
3Work out eligible Tier II: revaluation reserve at 45%, general provisions up to 1.25% of RWA, subordinated debt as allowed. Cap total Tier II at Tier I.
4Compute RWA by multiplying each asset and off-balance-sheet credit equivalent by its risk weight. Add them.
5Calculate CRAR and the Tier I ratio. Show both as percentages.
6Compare with the minimum ratios. State clearly whether the NBFC complies and the shortfall or surplus in rupees if asked.
7For exposure questions, compute each limit as a percentage of the stated capital base, compare the actual exposure, and state the excess or headroom.
8Write the conclusion in one line with any assumption you made.

Quickest way: Three-line CRAR shortcut

When to use it: Use in MCQs and in the last ten minutes of a numerical when you only need the ratio or a compliance verdict.

Tier I = equity items minus deductions. Write the number first.
Tier II = smaller of (discounted items) and Tier I. Check the 1.25% of RWA limit on general provisions.
CRAR = (Tier I + Tier II) ÷ RWA. Check Tier I ÷ RWA separately.
For exposure, multiply the capital base by the limit percentage once and compare with each exposure. Group first, then single borrower.

Common mistakes in Prudential Norms: Capital Adequacy and Exposure Limits

Taking the full revaluation reserve into Tier II.
Students treat all reserves as equal.
Fix: Count only the discounted amount. The RBI norms apply a 55% discount, so 45% is eligible. If the question gives a different discount, use that.
Ignoring the cap that Tier II cannot exceed Tier I.
The cap is a final check and is easy to skip.
Fix: After adding Tier II items, compare the total with Tier I and cut the excess.
Deducting intangibles and group investments from total capital instead of from Tier I.
Students compute total capital first and then deduct.
Fix: Deduct from owned fund to reach Tier I, before adding Tier II. Apply the group-investment deduction as the rule or the question states, in full if the question says so.
Applying 100% risk weight to cash and government securities.
Students forget that some assets carry nil weight.
Fix: Scan the asset list first and mark nil-weight items. Exclude them from RWA.
Checking only CRAR and not the Tier I ratio.
The question mentions CRAR in the heading.
Fix: Always compute both ratios and state compliance for each.
Using the wrong capital base for exposure limits, such as total assets or net worth.
Students recall the percentage but not the base.
Fix: Use the base named in the question (Tier I or owned fund). Apply single-borrower and group limits separately.

Worked examples

Example 1

An NBFC-ICC has the following (₹ crore): paid-up equity 300, free reserves 120, securities premium 30, intangible assets 20, investments in shares of group companies 40, revaluation reserve 60, general provisions 25. The general provisions are not linked to any identified impaired assets. Risk-weighted assets are ₹2,500 crore. Compute Tier I, Tier II, CRAR and the Tier I ratio. Assume the group investments are deducted in full, the revaluation reserve is counted after a 55% discount, the minimum CRAR is 15% and the minimum Tier I ratio is 10%.

Show the solution

Owned fund = 300 + 120 + 30 = ₹450 crore.
Tier I = 450 − 20 − 40 = ₹390 crore (group investments deducted in full, as assumed).
Revaluation reserve eligible = 60 × (100% − 55%) = 60 × 45% = ₹27 crore.
The ₹25 crore of general provisions is not linked to identified impaired assets, so the 1.25% of RWA limit applies. Limit = 1.25% × 2,500 = ₹31.25 crore. Actual 25 is within the limit, so ₹25 crore is eligible.
Tier II = 27 + 25 = ₹52 crore. This is below Tier I (₹390 crore), so the 100% cap does not bite.
Total capital = 390 + 52 = ₹442 crore.
CRAR = 442 ÷ 2,500 × 100 = 17.68%.
Tier I ratio = 390 ÷ 2,500 × 100 = 15.6%.

Answer: Tier I = ₹390 crore; Tier II = ₹52 crore; CRAR = 17.68% (above 15%); Tier I ratio = 15.6% (above 10%). The NBFC complies with both norms.

Exam tips

Show Tier I, Tier II, RWA and both ratios as separate lines. Marks are given for each step even if the final ratio is off.
State assumptions on risk weights, minimum ratios and exposure limits when the question is silent. Use the figures in the question first.
Read the asset list for nil-weight items such as cash and government securities before computing RWA.
In case-based MCQs, the quickest check is whether Tier II exceeds Tier I or whether a deduction was missed.
End the answer with a one-line compliance conclusion. Examiners look for this.

Practice questions from NBFCs - Provisioning Norms, Accounting and Reporting

Prudential Norms: Capital Adequacy and Exposure Limits: frequently asked questions

What is the formula for CRAR of an NBFC?

CRAR = (Tier I + Tier II capital) ÷ risk-weighted assets × 100. Tier II counts only up to the limit of Tier I. Compare the result with the minimum prescribed for the NBFC's category.

What is the difference between Tier I and Tier II capital?

Tier I is core capital such as equity and free reserves, after deductions. Tier II is supplementary capital such as discounted revaluation reserves, limited general provisions and subordinated debt. Tier II cannot exceed Tier I.

Do I compute CRAR on total assets?

No. CRAR is computed on risk-weighted assets. Each asset and off-balance-sheet item is multiplied by its risk weight. Nil-weight items like cash and government securities add nothing.

What are concentration of credit norms for NBFCs?

RBI caps exposure to a single borrower and to a single group, usually as a percentage of capital. The percentages and base depend on the NBFC category and layer. In the exam, apply the limits given in the question.