AT-1 bond is a big part of economics, and it is highly important for the profit related factors of banks. It is also known as perpetual bonds. It does not carry a maturity date, but it has an option of call. The “Reserve Bank of India” (RBI) regulates AT-1bonds of banks. The bonds are the elements of corporate debt issued by the different organizations.
Moreover, bonds are securitized like tradable assets. Generally, bonds have a fixed maturity date in which the principal amount should be paid in full. Otherwise, there is a risk of default. But, AT-1 bonds issued by banks have the opportunity to skip the interest pay-out.
The idea of “Additional tier 1 bond” (AT-1 bonds)
AT-1 bonds have a call option without having any maturity date. It has a perpetual nature and provides the investor with an offer to get a high return with a risk factor. It is associated with retained earnings and the equity of stakeholders. Moreover, it is responsible for disclosing reverse non-cumulative and non-redeemable preferred stock. “State Bank of India”(SBI) has issued AT-1 bondsin the year 2021 in September month. They have fixed the coupon by 7.55%. The banks can raise the “Basel III capital framework” by using such perpetual bonds regarding AT-1 bonds. RBI is responsible for the maintenance of all regulatory actions under AT-1 bonds.
Features of “Additional tier 1 bonds.”
- It is the instrument of a bank that is effective to know the financial status of any Bank.
- It has the characteristic of perpetual bonds that can use the call option to repurchase from the investors of the Bank.
- It has some instruments that do not have common equity.
- It has no proper maturity date.
- The holder does not have the facility to redeem at any time from it.
- The investor has to carry a fixed coupon annually for continuing AT-1 bonds.
- It has no fixed expiry date.
- It can be continued by availing of long-term capital.
- Different types of public sectors, Bank, cooperation and NBFCS are the common investors of perpetual bonds.
“Additional tier 1 bonds” (AT-1) versus “Additional tier 2 bonds” (AT-2)
Both the AT-1 bonds and AT-2 bonds are part of the mutual fund scheme under bank policies. AT-1 bonds are related to the tier 1 capital of sources of primary funding of any bank. It is part of the equity of stakeholders and retained earnings. But, AT-2 bonds are connected to the tier-2 capital that has the instruments like “revolution reverses, general loan loss reserves, subordinated term debt, undisclosed reverses and hybrid capital instruments”. Banks and government entities issue perpetual bonds primarily. The requirement of tier-1 capital is fulfilled by the Bank by issuing AT-1 bonds.
In contrast, tier-2 capital has the components of AT-2 bonds. The capital of AT-1 has a lower risk than AT-2 bond capitals. Both of the bonds have the chances of maturity as they are perpetual bonds. This is why there is no need to pay back the raw amount to the Bank. Corporations, Banks and NBFCs can issue AT-1 bonds. Additionally, lenders of the public sector mostly issue perpetual bonds. It has an expiry date, and long-term capital is required to continue it.
“Common Equity Tier 1” versus “Additional tier 1” capital
“Common Equity Tier 1” (CET -1) encompasses retained earnings and ordinary shares. It is a part of the capital under tier-1. It occupies the crore capital for holding the capital structure of any Bank. CET-1 ratio is applicable to compare the capital of any Bank with the risk-weighted assets to determine the ability for withstanding financial distress. Core capital is also part of CET-1, which can disclose reverses like retained earnings of any bank. It is the government with the equities such as stock, cash, a fund that are available in the Bank. Besides this, AT-1 capital is regulated by some instruments of uncommon equity.
AT-1 bonds have a call option without having any maturity date. It has a perpetual nature and provides the investor with an offer to get a high return with a risk factor. It is associated with retained earnings and the equity of stakeholders. Deep knowledge about the AT-1 bonds regarding the instrument like loans and funds etc., of any bank is essential to know about the profit and loss policies of the investors. It is also important for real-life to invest in banks and mutual funds to get maximum profit by knowing all the policies. It is the most important topic to clear the UPSC examination.