AT1 Bonds Write-Off Exposes Gaps

‘Misselling’ by bank executives leaves investors’ trust at stake, triggering risk aversion

- Rajat Mishra

The recent wounds created by Punjab & Maharashtra Cooperative (PMC) Bank’s failure have not healed yet. With RBI blowing the lid off another crisis in Yes Bank, it left depositors in the lurch, badly shaking people’s trust on Indian banking system.

On March 5, 2020, the RBI superseded the board of directors of Yes Bank and put it under moratorium, which was lifted on March 18. Within a few minutes of the announcement, digital payment networks collapsed and even internet and mobile banking services of the bank went dysfunctional. Baffled and panic-stricken depositors were left with no option other than flocking to ATMs and branches of Yes Bank.

Finance Minister Nirmala Sitharaman and RBI Governor Shakti Kanta Das kept assuring depositors about the safety of their money parked in Yes Bank, which according to its balance sheet calls itself India’s fourth-largest private sector lender.

Despite several safety assurances and taking depositors into confidence, one section who bore the maximum brunt was those who invested in Additional Tier 1 (AT1) bonds. These are quasi-equity instruments. They are like equity, but are structured as high interest-bearing bonds without any maturity date perpetual. They are generally considered to be superior to equity. And the bank with the RBI’s approval can very easily say it will not pay back if there is a situation where the bank lost so much money. In fact, if tier 1 capital ratio falls below a certain limit or when a bank needs massive capital infusion, this can be considered. This is exactly what led Yes Bank take such a call. On March 14, dashing hope of investors, Yes Bank issued a release to exchange that its AT1 bonds worth Rs 8,500 crore will be fully and permanently written off to zero.