CURRENT AFFAIRS

Detailed explanation-1: -Tier 2 Capital Bonds, as a rule, are subordinated debt. In the context of banking institutions, the capital of the first layer of the bank consists of deposits, and the capital of the 2nd layer includes hybrid tools, subordinated debt, and general reserves for covering losses on loans and others.

Detailed explanation-2: -Tier 2 bonds are a form of long-term investment and bank liability. Tier two bonds have a minimum five-year maturity and they are subject to regular amortization, which is an essential feature of debentures. Amortization is to set aside reserves for the redemption of the bond during its lifetime.

Detailed explanation-3: -What are the Tier 1 and Tier 2 bonds? Tier 1 capital is the primary funding source of the bank. Tier 1 capital consists of shareholders’ equity and retained earnings. Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserve.

Detailed explanation-4: -If a bank is approaching or has approached a point of non-viability (PONV), then RBI can write off the principal amount outstanding on Tier 2 bonds. Essentially bondholders can see their principal written off (partially or wholly) if the bank undergoes financial stress.