Why in the news?
According to a release sent by the cash-strapped Yes Bank to stock exchanges on March 15, 2020, bank’s additional tier 1 (AT1) bonds worth Rs 8,415 crore will be written down to zero. This is in line of globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.
What are AT1 bonds?
AT1 bonds, also known as Additional Tier 1 bonds, are unsecured perpetual bonds issued by banks to shore up their capital base to meet Basel III requirements.
Basel III norms were a set of rules that banking regulators around the world came up with after the global financial crisis in 2008, to strengthen bank balance sheets.
RBI is the regulator for these bonds. AT1 bonds are like any other bonds issued by banks and companies, which pay a fixed rate of interest at regular interval. Usually, these bonds pay a slightly higher rate of interest compared to similar, non-perpetual bonds. However, the issuing bank has no obligation to pay back the principal to investors.
These bonds are listed and traded on the exchanges. So if an AT1 bond holder needs money, he can sell it in the market.
The contract terms for AT1 bonds mention clearly that the value of these bonds can be completely written off if the bank’s capital ratios fall below certain regulatory thresholds. The write-off also kicks in if the RBI decides that the bank is beyond the “Point of Non Viability” or needs a public sector capital infusion to survive. (Indian Express and The Hindu)
