Mumbai: Indian banks have requested the authorities to ease norms for valuation of additional tier-1 bonds as fund-raising through such instruments has become more difficult due to stricter valuation norms introduced after investors suffered losses during the Yes Bank crisis.

“Banks have communicated to the NFRA (National Financial Reporting Authority) that it would be better for AT-1 bonds to be valued at yield-to-call option or market traded price – whichever is lower,” a source aware of the developments said to ET.

Typically, AT-1 bonds have a call option of 5 years or 10 years, which means that the bank issuing these instruments can redeem them or repay investors after that period.

“The 100-year valuation that exists at present has created volatility in pricing; there are issues with extrapolating that when the longest-dated central government security is 50 years,” said the source cited above.

Following the turbulence in Yes Bank early 2020, when the Reserve Bank of India (RBI) superseded the private bank’s board, the lender’s AT-1 bonds were written off, causing heavy losses to investors, including mutual funds.

The Securities and Exchanges Board of India (Sebi) then provided a phased timeline for mutual funds to value AT-1 bonds as 100-year instruments to protect retail investors from losses from such instruments. The 100-year valuation kicked in from April 1, 2023. Prior to this, AT-1 bonds were valued according to the call options on the papers, which were largely 5 years to 10 years.

Bond prices and yields move inversely. Longer-duration securities witness extreme swings in prices relative to small movements in yields. This implies that for investors like debt mutual funds, the NAV would stand to take a large hit if yields rose even slightly.No Fixed Maturity
AT-1 bonds are perpetual debt instruments issued by banks to build up their core equity capital. A perpetual instrument is one with no maturity date, implying that the issuer does not pay the principal amount back to investors but makes periodic interest payments throughout the life of the bond. For investors, the attraction of AT-1 bonds is the comparatively higher rate of interest earned through these securities.

However, these bonds have certain equity-like characteristics and features which permit banks to absorb losses. If a bank faces financial stress, with capital parameters dropping below a specific level, the covenants of AT-1 bonds typically permit the lender to hold off on interest payments or pay a lower amount. Banks can also write off AT-1 bonds in case of severe financial stress.

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