A type of reserve that a bank sets aside and holds out of its net earnings in each and every year as a security against unexpected losses and contingencies. It can also be used to offset accumulated losses or capitalized as paid-up capital with the approval of shareholders.

Surplus reserve consists of statutory surplus reserve and discretionary surplus reserve. Statutory surplus reserve can be used to offset previous years’ losses, if any, or to expand the a bank’s operations, and may be converted into share capital by the issuance of new shares to existing shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, subject to a specific balance (percentage) after such issue relative to the registered capital (balance is not less than 25%).

Surplus reserve is a component of tier-1 capital (core capital, or tranche-1).