Online Courses (English)
This just in:

State PCS

Daily Updates

Indian Economy

Additional Tier 1 Bonds

Star marking (1-5) indicates the importance of topic for CSE
  • 03 Sep 2021
  • 4 min read

Why in News

Recently, State Bank of India (SBI) has raised Rs. 4,000 crore of the Basel compliant Additional Tier 1 (AT1) bonds at coupon rate of 7.72%.

  • This is the first AT1 Bond issuance in the domestic market post the new SEBI regulations.
  • This is also the lowest pricing ever offered on such debt issued by any Indian bank since the implementation of Basel III capital rules in 2013.

Bonds

  • Bonds are units of corporate debt issued by companies and securitized as tradable assets.
  • A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
  • Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
  • They have maturity dates at which point the principal amount must be paid back in full or risk default.

Key Points

  • About:
    • AT1 bonds, also called perpetual bonds, carry no maturity date but have a call option. The issuer of such bonds may call or redeem the bonds if it is getting money at a cheaper rate, especially when interest rates are falling.
      • They are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
    • Banks issue these bonds to shore up their core capital base to meet the Basel-III norms.
    • These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.
    • Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.
    • Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
  • Regulated By:
    • AT-1 bonds are regulated by the Reserve Bank of India (RBI). If the RBI feels that a bank needs a rescue, it can simply ask the bank to write off its outstanding AT-1 bonds without consulting its investors.

Basel III Norms

  • It is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector, post 2008 financial crisis.
  • Under the Basel-III norms, banks were asked to maintain a certain minimum level of capital and not lend all the money they receive from deposits.
  • According to Basel-III norms, banks' regulatory capital is divided into Tier 1 and Tier 2, while Tier 1 is subdivided into Common Equity Tier-1 (CET-1) and Additional Tier-1 (AT-1) capital.
    • Common Equity Tier 1 capital includes equity instruments where returns are linked to the banks’ performance and therefore the performance of the share price. They have no maturity.
    • Together, CET and AT-1 are called Common Equity. Under Basel III norms, minimum requirement for Common Equity Capital has been defined.
  • Tier 2 capital consists of unsecured subordinated debt with an original maturity of at least five years.
    • According to the Basel norms, if minimum Tier-1 capital falls below 6%, it allows for a write-off of these bonds.

Source: TH

SMS Alerts
 

Please login or register to view note list

close

Please login or register to list article as bookmarked

close
 

Please login or register to make your note

close

Please login or register to list article as progressed

close

Please login or register to list article as bookmarked

close