Perpetual bonds by PSU banks offer higher rates than FDs

With the banks cutting interest rates on fixed deposits by up to 50 basis points, high net worth individuals (HNIs) can look at the perpetual or Additional Tier-I (AT1) bonds issued by public sector banks. The interest differential between bank FD rates and the spreads on these AT1 bonds is currently about 250-300 basis points. The spreads on the bonds are between 9.5-10.5 per cent.

Investors must keep in mind that these are not pure debt instruments. They are more like preference shares. The coupon is paid only if the issuing bank is profitable. In case the bank does not make does not make profits, it will skip the coupon and it gets accumulated. And given that banks are facing pressure from non-performing assets, investors must keep in mind the quality of the paper, even if the issuer is a a PSU bank.

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