Correct Answer:
Option C —
A is true but R is false
Analysis of the Statements
Assertion (A):
This is true. AT1 bonds are a type of unsecured, perpetual bond that banks issue to meet the capital adequacy requirements set by Basel III norms. They are designed to act as a cushion; if a bank’s capital falls below a certain threshold, these bonds can be written off or converted into common equity to absorb losses, thereby protecting the bank's core equity base.
Reason (R):
This is false. AT1 bonds are technically perpetual bonds, meaning they have no maturity date. While "long-term" usually implies a specific (though distant) end date, AT1 bonds are unique because they never mature. They only feature "call options" where the bank can choose to buy them back after a certain period (usually 5 or 10 years), but the investor cannot force the bank to pay them back. Therefore, categorizing them simply as "long-term bonds" is technically inaccurate in a regulatory sense.
Understanding AT1 Bonds
No Maturity: Unlike regular bonds, there is no date on which the principal must be returned.
High Risk, High Return: Because they are "subordinated" debt (meaning they are paid last in case of failure) and can be written off during a crisis, they offer higher interest rates than regular bonds.
Regulatory Purpose: They are part of Tier 1 Capital, which is the primary funding source of a bank and consists of its most reliable forms of capital.
The "Point of Non-Viability" (PONV): If the RBI or relevant authority decides a bank is no longer viable, it can trigger a clause that allows the bank to stop paying interest or even cancel the principal of AT1 bonds entirely to save itself.
Answer verified by Quintessence Classes faculty — Karan Nagar, Srinagar.
