‘RBI’s stand on AT1 bonds may deter investors’

MUMBAI: The Reserve Bank of India’s (RBI) characterisation of YES Bank’s Additional Tier 1 (AT1) bond write-down will scare off future investments in such instruments and deprive midsized lenders of a valuable source of funds, fund managers and lawyers said.

As part of a rescue led by State Bank of India in the March quarter, troubled private lender YES Bank wrote down AT1 bonds worth ₹8,415 crore. In an affidavit before the Madras high court earlier this month, RBI said these bonds carry higher interest rates because of their higher risks, raising worries that this could lead to similar write-downs when a bank’s capital falls below regulatory requirements.

“Investors in AT1 bonds would need to brace for such a complete write-off of investment, especially in those of smaller-sized banks. So, it is unlikely we would subscribe to fresh issuances,” a fund manager said on condition of anonymity.

The development comes at a time when at least four banks— State Bank of India, HDFC Bank, Bank of Baroda and Canara Bank—have said some of their fresh fundraisings would be through AT1 bonds.

63 Moons Technologies Ltd, which held YES Bank’s AT1 bonds of ₹300 crore, moved a petition in Madras HC in June against RBI and YES Bank. It said that previously, in the case of public sector banks, the bonds were redeemed first and reconstruction came later, but in the case of YES Bank, it was in the reverse order.

“This is illegal and contrary to the provisions of Section 45 of the Banking Regulation Act,” said 63 Moons.

In its reply, RBI said bondholders were fully aware of the risks while investing and that they were contractually bound and cannot challenge the writeoff. An email sent to RBI seeking a response remained unanswered.