Money Clarity

Bank bonds in India: why a bank's bond is not a bank FD

The same bank can offer you a fixed deposit and a bond, and they feel like the same thing with a different rate. They are not. Your FD is a deposit: the bank owes it to you first, and deposit insurance covers it up to ₹5 lakh. The bond is a loan you make to the bank on the bond's own terms: no deposit insurance, and for some kinds of bank bond, terms that let the bank cut what it owes you.

That is not hypothetical. In March 2020 a private bank wrote down ₹8,415 crore of its AT1 bonds to zero. The bondholders won in the Bombay High Court in January 2023 and again in the Supreme Court on 15 October 2026, six and a half years later.

This page explains the kinds of bank bond, where each sits when a bank is in trouble, and how to decide whether the extra yield pays for that.

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Last reviewed 2026-11-01

Why a bank's bond is not a bank deposit

The technique

Ask where you stand in the queue, not who the issuer is

A bank's name on the paper tells you whose money it is, not when you get paid. Deposits rank ahead of bonds, senior bonds ahead of subordinated ones, and AT1 bonds sit just above shareholders. The same bank can be very safe for a depositor and risky for an AT1 holder at the same time.

DICGC, the deposit insurer owned by the RBI, insures savings, fixed, current and recurring deposits up to ₹5 lakh per depositor per bank. Its own guide lists stocks and bonds among the things it does not cover. A bond issued by a bank is a bond, so the ₹5 lakh cover that makes a bank FD feel safe does not apply to it.

The second difference is rank. If a bank fails or is rescued, depositors are dealt with first. Bondholders are paid from what is left, in the order their bonds' terms set, and the most junior bank bonds can be written down before the bank is wound up at all.

A bank FD up to ₹5 lakh is insured. The same bank's bond, of any size, is not
Bank bonds can be safe. They are safe because of the bank's strength and the bond's rank, not because of insurance

Three kinds of bank bond, from safest down

Banks issue bonds for different reasons, and the reason decides the risk. These three cover most of what an individual investor will see offered.

Kind	Why the bank issues it	Where it ranks	What can go wrong
Infrastructure and other senior bonds	To fund long-term lending	With other senior creditors, behind depositors	The bank defaults; rare for large banks
Tier 2 bonds	To count as regulatory capital	Below senior bonds	Losses in a resolution reach them before senior bonds
AT1 (perpetual) bonds	To count as core capital	Just above shareholders	Coupon can be skipped; principal can be written down

Order of rank in a bank failure, simplified. The bond's offer document sets the exact terms; read the sections on write-down, coupon discretion and call options.

AT1 bonds have no maturity date. The bank may call them back on set dates but is not obliged to, so the money may stay out far longer than you planned
A higher yield on AT1 or Tier 2 paper is payment for ranking lower, not a reward for loyalty to a strong bank

What March 2020 taught bondholders

On 14 March 2020, as part of a rescue, ₹8,415 crore of a private bank's AT1 bonds were written down to zero while depositors were protected. Bondholders went to court. The Bombay High Court quashed the write-down in January 2023, and on 15 October 2026 the Supreme Court dismissed the appeals against that judgment, finding that the bonds could not be written down without a specific provision in the reconstruction scheme.

The bondholders won, but the lesson for an investor is in the dates. For six and a half years their money was frozen in litigation. A depositor in the same bank lost nothing and waited for nothing.

Winning in court is not the same as getting paid on time. Count the years a dispute can take as part of the risk
If you would need the money within five years, a perpetual bond that can be written down is the wrong home for it

Is the extra yield worth it? A worked example

Farhan has ₹5 lakh and compares a bank FD at an illustrative 7% with the same bank's AT1 bond at an illustrative 9%. Over three years, with interest compounding annually, the FD earns ₹1,12,522 and the bond ₹1,47,515. The bond pays ₹34,993 more before tax.

That ₹34,993 is what Farhan is paid for three things: giving up deposit insurance on ₹5 lakh, ranking just above shareholders, and accepting that the bond may not be called back on the date he expects. If the bank is among the strongest in the country, he may decide that is fair. If he cannot say how the bond's write-down clause works, he is not yet able to judge the price.

Farhan's ₹5 lakh, three years, illustrative rates

Bank FD at 7%, insured up to ₹5 lakh: ₹1,12,522 interest
AT1 bond of the same bank at 9%, not insured: ₹1,47,515 interest
Extra earned for the extra risk: ₹34,993

Illustrative rates, annual compounding, before tax. FD interest and bond interest are both taxed at your slab rate.

Put a ceiling on lower-ranked bank paper: whatever you place there should be money whose loss would hurt but not change your plans

How to buy bank bonds, and what to check

Individuals usually buy bank bonds on the stock exchange through a demat account, or through a SEBI-registered online bond platform. Either way, the checks are the same.

Find the kind of bond in the offer document: senior, infrastructure, Tier 2 or AT1. The name of the bank tells you nothing about this
Read the credit rating and the rating of the bank itself; AT1 bonds are usually rated below the bank's senior debt
For AT1, read the write-down trigger, whether the coupon can be skipped, and the call dates. If you cannot find them, do not buy
Check how easily the bond trades. Selling a thinly traded bond before maturity can mean accepting a lower price

Common questions

Are bank bonds safe in India?

Senior bonds of strong banks are low risk, but no bank bond has deposit insurance: DICGC covers deposits up to ₹5 lakh per bank and lists bonds among what it does not cover. AT1 bonds, the most junior kind, can be written down; ₹8,415 crore of one bank's AT1 bonds were written down in March 2020.

What is the difference between a bank FD and a bank bond?

An FD is a deposit, insured up to ₹5 lakh per depositor per bank and repaid ahead of bondholders. A bond is a loan to the bank on the bond's own terms, uninsured, ranking behind depositors, and sometimes with clauses that allow the coupon to be skipped or the principal written down.

What are AT1 bonds?

Additional Tier 1 bonds are perpetual bonds banks issue to count as core capital. They rank just above shareholders, have no maturity date, may skip coupons and can be written down if the bank's capital falls below a trigger. They pay more because they absorb losses early.

How do I invest in bank bonds?

Through a demat account on the stock exchange, or a SEBI-registered online bond platform. Before buying, identify whether the bond is senior, infrastructure, Tier 2 or AT1, read its rating and, for AT1, its write-down and call terms.

A bank's bond is a loan to the bank on the bond's own terms, not a deposit. It has no DICGC cover, ranks behind depositors, and in the case of AT1 bonds can be written down, as ₹8,415 crore was in March 2020 before courts reversed it six and a half years later. Buy bank bonds for the yield only after reading which kind you hold and where it ranks.

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