AT1 Bonds: Discouraged Market
The underwhelming subscription to State Bank of India’s additional tier-1 (AT-1) bond issue has dampened market sentiment and is expected to make fund-raising harder for other PSU banks.
- AT1 bonds are a type of unsecured, perpetual bonds that banks issue to improve their core capital base.
- The money raised through these bonds is kept aside as a shock absorber by the bank.
- They have a call option, which can be used by the banks to buy these bonds back from investors.
- These bonds were created in the wake of the 2008 financial crisis to absorb the losses.
- These bonds are also called contingent convertible bonds or CoCos.
- These bonds are also mandatory under Basel=III norms.
- The banks must maintain capital at a minimum ratio of 11.5 per cent of their risk-weighted loans. Of this, 9.5 per cent needs to be in Tier-1 capital. AT1 bonds fall under this type of capital.
- These bonds are long-term and do not carry any maturity date. Because of a higher risk, they offer a higher yield.
- In India AT-1 bonds are regulated by the Reserve Bank of India (RBI).