Perpetual bonds by PSU banks offer higher rates than FDs

Liquidity can be an issue. Also dividends are paid only if issuing banks is profitable

With the banks cutting interest rates on fixed deposits by up to 50 basis points, high net worth individuals (HNIs) can look at the perpetual or Additional Tier-I (AT1) bonds issued by public sector banks. The interest differential between bank FD rates and the spreads on these AT1 bonds is currently about 250-300 basis points. The spreads on the bonds are between 9.5-10.5 per cent.

Investors must keep in mind that these are not pure debt instruments. They are more like preference shares. The coupon is paid only if the issuing bank is profitable. In case the bank does not make does not make profits, it will skip the coupon and it gets accumulated. And given that banks are facing pressure from non-performing assets, investors must keep in mind the quality of the paper, even if the issuer is a a PSU bank.

One must also keep in mind liquidity. These bonds cannot be redeemed as easily as a bank FD or income funds, which are the other options that investors looking for fixed income instruments typically consider, says Prateek Pant, co-founder and head of products and solutions at Sanctum Wealth Management.

These bonds can be bought from authorised dealers or through private transactions. The minimum lot size amount can be Rs 25 lakh, but usually lot sizes are Rs one crore and above. But if you buy through a portfolio manager, then you can spread them across different bonds.

“The options on the debt side are getting limited. Investors have exhausted their allocation to G-Secs and now corporate bonds too. So, now these perpetual or AT1 bonds are another option,’’ says Pant.