What are Additional Tier-1 bonds? Discuss their role in bank capital and the risks they pose to retail investors in India.

Additional Tier-1 (AT1) bonds are perpetual, unsecured bonds issued by banks. They behave partly like debt and partly like equity. RBI's Basel III rules require that, at RBI's option, they can be permanently written off or converted into shares at the Point of Non-Viability (PONV) [1]. Because of this risk they pay higher interest. In October 2026 the Supreme Court set aside Yes Bank's ₹84 billion AT1 write-off [3], which shows both their purpose and their danger.

Role in bank capital

Loss absorption order (first → last)
CET1 (equity) → AT1 bonds → Tier-2 debt → Depositors

Fig: AT1 sits just below equity in the capital structure

• Going-concern cushion: AT1 counts towards Tier-1 capital, so it absorbs losses while the bank is still operating [1].
• Capital without dilution: banks can meet Basel III ratios without issuing new shares, so existing owners keep their stakes.
• Bail-in tool: the PONV clause puts losses on investors rather than taxpayers. RBI's draft Yes Bank reconstruction scheme (March 2020) proposed writing off AT1 bonds permanently and in full [2].
• Coupon discretion: the bank can skip interest payments when it is under stress, which preserves its capital.

Risks to retail investors

• Total loss: Yes Bank's AT1 bonds were wiped out in 2020 [3].
• Order of losses reversed: AT1 holders lost everything, while shareholders faced only a three-year lock-in on 75% of their shares [3].
• Mis-selling: relationship managers reportedly sold the bonds to fixed-deposit customers as safe products. SEBI penalised the bank's former CEO over the resale of AT1 bonds to retail investors [4].
• Perpetual and illiquid: the bonds have no maturity date. An investor can exit only through a thin secondary market or if the bank calls the bond back.
• Legal uncertainty: the write-off was in the draft scheme [2] but missing from the final one. The Bombay HC (2023) quashed it, and the Supreme Court decided the appeals only in 2026 [3]. That is six years of frozen savings.

AT1 bonds strengthen bank capital, but only if investors understand the risk and the write-off is done lawfully. As a way forward:

• RBI should write any write-off into the notified resolution scheme and make sure shareholders bear losses first.
• SEBI should check that buyers are suitable for the product at the point of sale.
• Investor-literacy efforts should explain how AT1 bonds work.

Together these would let AT1 bonds stay a useful loss-absorbing buffer that is not sold to unsuspecting depositors as a safe investment.