What are AT-1 Bonds?

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.