Additional Tier 1 (AT1) bonds: notes for bank exams

At a glance

AT1 bonds are perpetual bonds that banks issue to build Tier 1 capital under Basel III. They pay a higher coupon than ordinary bonds because investors take equity-like risk: the bank can skip coupons, and if its capital falls too low or it is close to failure, the bonds can be written down or converted into shares. The ₹8,415 crore Yes Bank write-off of March 2020 is India's best-known AT1 case.

Key facts

Capital tier: Additional Tier 1, part of Tier 1 capital along with Common Equity Tier 1 (CET1)
Framework: Basel III, implemented in India by the RBI from 1 April 2013
Maturity: perpetual (no fixed maturity date)
Call option: issuer may call after at least 5 years, only with RBI approval
Coupon: non-cumulative and fully discretionary; a skipped coupon is lost for good
Pre-specified trigger (RBI): CET1 falling below 6.125% of risk-weighted assets
PONV trigger: write-off or conversion when the RBI judges the bank has reached the Point of Non-Viability
Investor limit (SEBI, from 12 October 2020): only qualified institutional buyers; minimum allotment and trading lot of ₹1 crore
Yes Bank write-off: ₹8,415 crore on 14 March 2020 during its SBI-led reconstruction
Final verdict: Supreme Court upheld the quashing of that write-off on 15 October 2026

How it works

A bank needs a minimum amount of capital against its risk-weighted assets. Equity (CET1) is the best-quality capital but is costly to raise, so Basel III lets banks fill part of the Tier 1 requirement with AT1 instruments. To qualify, the instrument must absorb losses while the bank is still running ("going concern" capital), unlike Tier 2 bonds, which absorb losses mainly after failure.

Loss absorption happens in three ways:

Coupon discretion: the bank can cancel interest payments at any time, without this counting as a default.
Pre-specified trigger: if CET1 falls below the trigger level, the bonds are written down (fully or partly) or converted into equity.
PONV trigger: if the regulator decides the bank cannot survive without a write-off or a public capital injection, the bonds can be written off permanently.

Feature	AT1 bond	Tier 2 bond	Equity (CET1)
Maturity	Perpetual	At least 5 years	Perpetual
Interest/dividend	Discretionary, non-cumulative	Fixed obligation	Discretionary
Absorbs loss	Going concern and PONV	Mainly at failure (gone concern)	First loss
Ranking in liquidation	Above equity, below Tier 2	Above AT1	Last

Because they rank just above equity and can be wiped out, AT1 bonds are unsuitable for retail savers. After many small investors lost money in the Yes Bank case, SEBI restricted fresh issues to institutional buyers.

Timeline

2010: Basel Committee publishes Basel III, creating the AT1 category
2013: RBI's Basel III capital rules take effect in India (1 April)
2020: Yes Bank placed under moratorium (5 March); AT1 bonds of ₹8,415 crore written off (14 March) under the reconstruction scheme
2020: SEBI limits AT1 issues to QIBs with a ₹1 crore minimum (circular of 6 October)
2023: Bombay High Court quashes the Yes Bank write-off (20 January); Swiss regulator FINMA writes off about CHF 16 billion of Credit Suisse AT1 bonds in its UBS takeover (March)
2026: Supreme Court dismisses the appeals and upholds the High Court (15 October)

Recent developments

15 Oct 2026: The Supreme Court dismissed appeals by Yes Bank, the RBI and the Centre, upholding the Bombay High Court's January 2023 judgment that quashed the ₹8,415 crore AT1 write-off. The court held that the administrator had no authority to write the bonds down, because the write-down clause in the draft reconstruction scheme had been dropped from the final scheme notified by the Centre. Yes Bank shares fell about 14% that day.

Exam traps

AT1 is Tier 1 capital, not Tier 2, even though it is a bond.
"Perpetual" does not mean it can never be repaid: the bank can call it after 5 years with RBI approval.
Missed AT1 coupons are not cumulative, unlike cumulative preference shares.
The Yes Bank rescue (2020) was led by SBI under Section 45 of the Banking Regulation Act; the write-off was quashed on procedure, not because AT1 bonds cannot be written off.
Do not confuse the 6.125% CET1 trigger with the 5.5% minimum CET1 ratio.

Quick check

Q: Which capital tier do AT1 bonds count towards? A: Tier 1 (Additional Tier 1), under Basel III.
Q: How much of Yes Bank's AT1 bonds were written off in 2020? A: ₹8,415 crore.
Q: Who may subscribe to fresh AT1 issues in India? A: Only qualified institutional buyers, with a minimum lot of ₹1 crore (SEBI, 2020).

Additional Tier 1 (AT1) bonds