Appendix PCD-2 Comprehensive Example of Deductions
Bank "x" with capital base of 10,000,000 before deductions (consisting of 5,000,000 Tier 1 and 5,000,000 Tier 2) has made four investments listed below along with the amount required to be deducted from the capital for capital adequacy purposes:
| Investment | Amount | Deduction requirement (For rules refer to chapter PCD-2) |
| Bank "a" | 1,000,000 | 1,000,000 |
| Insurance entity "b" | 3,000,000 | 3,000,000 4 |
| Commercial entity "c" | 2,000,000 | 500,000 5 |
| Entity "d" | 500,000 | 400,000 6 |
| Total | 6,500,000 | 4,900,000 |
Determination of eligible Tier 1 and Tier 2 capital:
These deductions include Goodwill of 100,000 & reciprocal cross holdings of 400,000 in Tier 1.
Determination of eligible capital:
| Tier 1 capital | Tier 2 capital | |
| Capital base | 5,000,000 | 5,000,000 |
| Goodwill 7 | (100,000) | - |
| Reciprocal cross-holding 8 | (400,000) | - |
| Other deductions (Equally from Tier 1 and Tier 2) (4,900,000 - 500,000=4,400,000/2) | (2,200,000) | (2,200,000) |
| Resulting capital | 2,300,000 | 2,800,000 |
| Eligible capital | 2,300,000 | 2,300,000 9 |
Calculation of CAR:
CAR = Eligible capital/Risk-Weighted Assets
= (2,300,000 + 2,300,000)/(Say) 40,000,000 = 4,600,000/40,000,000 = 11.5%
4 This investment is 30% of the insurance "b" capital.
5 This investment is 20% of the bank's capital. As such the amount exceeding 15% i.e. 500,000 will be deducted.
6 This investment is 2% of entity "d"s capital. Entity "d" has also made investment in Tier 1 capital of Bank "x" amounting to 400,000. This amount (400,000), being cross-holding, is required to be deducted from regulatory capital of the bank "x".
7 This represents goodwill arising at the time of acquisition of a consolidated subsidiary.
8 As this cross-holding exists in Tier 1 capital (see footnote 3), this amount must be deducted from the same tier.
9 Tier 2 can not exceed 100% of Tier 1 (after all subsequent deductions).