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PSU banks wary after SBI’s dismal AT-1 bond issue

  • July 15, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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PSU banks wary after SBI’s dismal AT-1 bond issue

Subject : Economy

Section: Monetary Policy

Concept :

  • The underwhelming subscription to State Bank of India (SBI)’s additional tier-1 (AT-1) bond issue on Thursday has dampened market sentiment and is expected to make fund-raising harder for other PSU banks, even leading to delays in certain cases.

Additional Tier – 1 Bonds

  • AT-1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
  • There are two routes through which these bonds can be acquired:
  • Initial private placement offers of AT-1 bonds by banks seeking to raise money.
  • Secondary market buys of already-traded AT-1 bonds.
  • AT-1 bonds are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
  • 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.
  • However, the issuing banks have the option to recall AT-1 bonds issued by them (termed call options that allow banks to redeem them after 5 or 10 years).
  • Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
  • AT-1 bonds are regulated by 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.
economy PSU banks wary after SBI’s dismal AT-1 bond issue

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