AT-1 bond returns are attractive compared to FDs, but factor in the risks

Their spread over G-Secs of comparable maturity have also declined compared to historical averages

Additional tier 1 (AT1) bonds, which the market had shunned after the YES Bank debacle, are once again gaining popularity. Seven banks have raised ~18,376 crore through these bonds since July at yields ranging between 7.75 per cent and 8.75 per cent.

Many high networth individuals (HNIs), too, are gravitating towards them since these rates are much higher than State Bank of India’s (SBI’s) fixed deposit (FD) rate of 5.65 per cent (6.45 per cent for senior citizens) for a 5–10-year tenure.

Quasi-equity features

To lend more, banks need to shore up their equity capital. However, they don’t like to issue additional equity.