Whenever banks raise money, the words equity and debt usually come up. But there’s a third category that sits somewhere in between, and that is where additional tier 1 bonds come in. They are part of the capital structure of banks, designed to give lenders a cushion during tough times. For investors, they can look attractive because of the higher interest, but their role is more about strengthening the system than just offering yield.
Let’s break it down. A normal bond has a fixed maturity date. You know exactly when you’ll get your principal back. Additional tier 1 bonds don’t work that way. They are perpetual, which means there is no fixed redemption date. The bank may call them back after a certain period, but it isn’t obliged to. For the investor, this introduces uncertainty. For the bank, it ensures long-term, stable capital that regulators want to see on the balance sheet.
Why does the regulator care. After the global financial crisis, rules tightened worldwide. Banks were required to hold more buffers to protect depositors and keep the system stable. By issuing additional tier 1 bonds, Indian banks meet these requirements without diluting shareholder equity. It’s a win for them — they raise money at attractive terms, strengthen their ratios, and satisfy RBI’s capital adequacy norms.
Now here’s the part investors need to understand. Coupons on these bonds are discretionary. If a bank is under stress, it can skip an interest payment. In extreme cases, regulators can even write down the value, wiping out part or all of the investment. This has happened internationally, and it serves as a reminder that these are not ordinary debt instruments. So while they show up in conversations about bonds in india, they sit at the riskier end of the spectrum.
Liquidity is another issue. Yes, some are listed on exchanges, but trading volumes are limited. Unlike a government bond that finds buyers easily, AT1s may be harder to exit. That means investors should be ready to hold them longer than expected.
From the bank’s perspective, though, these instruments are crucial. They give flexibility in raising capital, they protect depositors by providing an extra cushion, and they allow growth without constant equity dilution. In many ways, additional tier 1 bonds are part of the safety net of the banking sector.
So how should investors approach them. First, by recognising that not all bonds are created equal. Government securities, corporate bonds, and perpetual AT1s all serve different purposes. A retail saver entering the bonds in india space may find the high coupon on AT1s tempting, but the risks are not hidden fine print — they are part of the design.
Think of them as specialised tools. Just as you wouldn’t use a hammer for every household repair, you shouldn’t treat AT1s like regular bonds. They can be a small slice of a diversified plan, but never the foundation.
In short, additional tier 1 bonds play a dual role — strengthening the capital base of banks and offering investors higher yields for higher risk. For households exploring bonds in india, the key is not to confuse them with safer fixed-income options. Understand the purpose, weigh the risks, and only then decide if they deserve a place in your portfolio.
