Capital Markets: Challenges and Developments

What are AT-1 Bonds?


From UPSC perspective, the following things are important :

Prelims level: AT-1 Bond

Mains level: NA

Central Idea

  • Subscription Disappointment: State Bank of India (SBI)’s additional tier-1 (AT-1) bond issue saw a very low response from investors, raising ₹3,101 crore against an issue size of ₹10,000 crore.
  • Market Sentiment Impact: The lackluster response is expected to dampen market sentiment and make fundraising more challenging for other PSU banks, potentially leading to delays in their fundraising plans.

What are AT1 Bonds?

  • Definition: AT-1 bonds, or Additional Tier-1 bonds, are unsecured, perpetual bonds issued by banks to strengthen their core capital base in compliance with Basel-III norms.
  • Complex Hybrid Instruments: AT-1 bonds are complex instruments suited for institutions and knowledgeable investors who can analyze their terms and determine if the higher rates compensate for the higher risks involved.
  • Face Value: Each AT-1 bond typically carries a face value of ₹10 lakh.
  • Acquisition Routes: Retail investors can acquire these bonds through initial private placement offers by banks or by purchasing already-traded AT-1 bonds in the secondary market based on broker recommendations.

Key Features and Importance of AT1 Bonds

  • Perpetual Nature: AT-1 bonds do not have a maturity date. Instead, they include call options that allow banks to redeem them after a specific period, usually five or ten years. Banks can choose to pay only interest indefinitely without redeeming the bonds.
  • Flexibility in Interest Payments: Banks issuing AT-1 bonds can skip interest payouts or even reduce the bonds’ face value if their capital ratios fall below certain thresholds specified in the offer terms.
  • Regulatory Intervention: If a bank faces financial distress, the RBI has the authority to ask the bank to cancel its outstanding AT-1 bonds without consulting the investors.

Back2Basics: Basel Norms

  • Basel is a city in Switzerland and the headquarters of the Bureau of International Settlement (BIS).
  • The BIS fosters cooperation among central banks to achieve financial stability and common standards of banking regulations.
  • Basel guidelines are broad supervisory standards formulated by the Basel Committee on Banking Supervision (BCBS).
  • The Basel accord is a set of agreements by the BCBS that primarily focuses on risks to banks and the financial system.
  • The purpose of the Basel accord is to ensure that financial institutions maintain sufficient capital to meet obligations and absorb unexpected losses.
  • India has accepted the Basel accords for its banking system.


Basel I Basel II Basel III
Year Introduced 1988 2004 2010
Focus Credit Risk Credit, Market, Operational Risks Capital, Leverage, Funding, Liquidity
Capital Requirement Fixed at 8% of Risk-Weighted Assets (RWA) Minimum Capital Adequacy Requirement of 8% of Risk Assets Strengthening capital requirements
Pillars 1. Capital Adequacy Requirements 2. Supervisory Review 3. Market Discipline
Objective Define capital and risk weights for banks Encourage better risk management and disclosure Promote a more resilient banking system
Implementation in India Adopted in 1999 Yet to be fully implemented March 2019 (postponed to March 2020 due to COVID-19)
Key Parameters Capital: 12.9% capital adequacy ratio, Tier 1 and Tier 2 capital ratios, capital conservation buffer, and counter-cyclical buffer; Leverage: minimum 3% leverage rate; Funding and Liquidity: LCR and NSFR ratios


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