![]() ![]() In comparison, most bank FDs can be redeemed at any time after paying an interest rate penalty (usually 1%). This lack of liquidity was one of the factors that forced Franklin Templeton Mutual Fund to wind up six of its debt schemes on 23 April. However, the Indian corporate bond market is extremely thin and you may not get any buyers. If you need money for your financial goals or an emergency, you will have to sell your perpetual bonds in the market. Many of these loans under moratorium can become non-performing assets (NPAs) and wipe out perpetual bonds. An economy in recession can convert a borrower in temporary distress into a borrower who is insolvent. However, there is no guarantee that the economy will revive after June. Moratorium is a facility given by the Reserve Bank of India (RBI) under which a borrower can halt repayments on loans until June-end. Around one-third of the loan books of major Indian banks are under moratorium, a media presentation by Motilal Oswal AMC on showed. It may be noted that banks are under stress due to the Covid-19 crisis. However, as the case of Yes Bank shows, in times of distress banks can not only skip repayment, but also write down the bonds. ![]() Andhra Bank, a nationalized bank, tried to skip repayment in December 2019, but reversed its position within a few days due to pressure from the markets. In the past, banks have chosen to exercise call options to avoid market panics. It can choose to not repay the principal and simply keep paying the interest. The bank is not bound to pay back the investors in these bonds. In reality, these marketing pitches hide the fact that the maturity of the bond is simply the bank’s right to repay the principal value. Perpetual bonds are often marketed as having a five- or 10-year tenor. Investing the same amount in a debt mutual fund can get you access to a portfolio of 20-50 different kinds of debt papers, thereby reducing risk. Nishith Baldevdas, a Chennai-based Sebi-registered investment adviser pointed out that these bonds have concentration risk due to their large ticket size (minimum ₹10 lakh). The AT1 write-down was done while leaving the bank’s share capital intact, in effect placing perpetual bond holders below even shareholders. The bank’s FD investors were not subject to losses although temporary restrictions were placed on withdrawals. In March 2020, when the bank faced a crisis, it chose to write down the entire value of some of its perpetual bonds (called AT1), amounting to about ₹8,700 crore. This makes them a lot closer in nature to equity than debt.īond investors are not treated with the same care as FD investors, as the example of Yes Bank shows. If a bank’s capital dips below certain thresholds due to bad assets, they can skip interest payments on these bonds and even write-down their value. These bonds are issued under Basel norms to shore up the capital of banks. Unlike FDs (which have a guarantee of up to ₹5 lakh under deposit insurance), perpetual bonds have no guarantee even though they are issued by banks. ![]()
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