Why Yes Bank’s 2020 AT1 Bond Write-Off Is Back in Focus
Blog by Aliceblue News Desk
23 October 2026
11 minutes
Yes Bank has spent the last several years rebuilding itself after the banking crisis that nearly brought it down in 2020. Its asset quality has improved, fresh capital has entered the bank, and Sumitomo Mitsui Banking Corporation (SMBC) has emerged as its largest shareholder.
But one of the most controversial decisions taken during the rescue has returned to the centre of the conversation.
On October 15, 2026, the Supreme Court upheld the Bombay High Court’s decision to quash Yes Bank’s ₹8,415 crore Additional Tier-1, or AT1, bond write-off. The ruling does not change the fundamental purpose of AT1 bonds, which are designed to absorb losses during periods of severe banking stress. Instead, it raises a much more specific question: whether the write-off was carried out through the legally permitted process.
For investors trying to understand why a bond can potentially lose its entire value, it is useful to first understand how bonds work and the risks associated with debt instruments.
The Supreme Court ruling has now brought Yes Bank’s 2020 rescue back into focus because reversing the write-off could affect the bank’s capital ratios, future coupon obligations and shareholder value.
What Happened to Yes Bank in 2020?
By early 2020, Yes Bank was facing a severe deterioration in its financial position.
Years of stressed corporate loans, rising bad assets and weakening capital had left the bank with limited room to absorb further losses. Its Common Equity Tier-1, or CET1, ratio had fallen to 0.6% as of December 31, 2019, compared with an applicable regulatory requirement of 7.375%.
CET1 represents the strongest form of a bank’s regulatory capital. It mainly consists of equity capital and retained earnings and acts as the first layer of protection when losses occur.
When this buffer becomes too weak, regulators become concerned about whether the institution can continue absorbing losses while protecting depositors and maintaining financial stability.
On March 5, 2020, the Reserve Bank of India placed Yes Bank under a moratorium and appointed an administrator. A reconstruction scheme was subsequently prepared, and a consortium of banks led by State Bank of India injected fresh equity into Yes Bank.
The rescue kept the bank operational.
But recapitalising the institution did not automatically eliminate the financial losses accumulated before the rescue. Those losses still had to be absorbed somewhere within the bank’s capital structure.
That is where Yes Bank’s AT1 bonds became important.
What Are AT1 Bonds?
Additional Tier-1 bonds are a specialised form of bank capital.
They may look like conventional bonds because investors receive coupon payments, but their risk structure is very different from ordinary corporate debt.
AT1 instruments are generally perpetual, meaning they do not have a conventional maturity date. Banks may have call options that allow them to redeem the instruments under certain conditions, but investors cannot assume repayment will happen on a fixed date.
More importantly, AT1 bonds are specifically designed to absorb losses when a bank faces severe financial stress.
Depending on regulatory conditions and the terms of the instrument, AT1 bonds may be:
- written down partially or completely,
- converted into equity,
- subject to skipped coupon payments, or
- otherwise used to absorb losses before depositors are affected.
That makes them considerably riskier than traditional fixed-income products.
Higher yields on instruments such as AT1 bonds are therefore not simply an additional return opportunity. They are compensation for accepting substantially greater risk.
This principle applies more broadly across fixed-income investing. Even conventional debt securities carry credit, liquidity and interest-rate risks, which is why investors evaluating debt mutual funds should look beyond headline yields and understand what the underlying portfolio actually owns.
Why Were Yes Bank's AT1 Bonds Written Down?
Yes Bank had issued two major tranches of AT1 bonds: ₹3,000 crore in December 2016 and ₹5,415 crore in October 2017, taking the affected amount to ₹8,415 crore.
During the 2020 rescue, the bank’s administrator permanently wrote these securities down to zero.
For bondholders, that effectively meant losing the entire value of their investment.
The economic argument behind such a move was straightforward.
AT1 bonds exist precisely because banks need a layer of capital capable of absorbing losses during exceptional stress. If a bank reaches the point of non-viability, AT1 investors are supposed to bear losses before taxpayers or depositors are called upon to do so.
However, the Supreme Court case was not primarily about whether AT1 bonds are capable of absorbing losses.
It was about whether the specific Yes Bank write-off was carried out through the legally authorised mechanism.
Why Did the Supreme Court Quash the Write-Off?
The distinction is crucial.
The draft Yes Bank reconstruction scheme contained a provision proposing the permanent write-down of the AT1 bonds.
But when the final reconstruction scheme was notified by the Central Government on March 13, 2020, that specific provision had been removed.
Despite this, Yes Bank’s administrator wrote down the ₹8,415 crore of bonds on March 14.
The Supreme Court held that the administrator could not exercise that power after the reconstruction scheme had already taken effect. It also concluded that the administrator could not assume regulatory powers that belonged to the RBI under the applicable framework.
This is an important distinction for investors.
The Court did not rule that AT1 instruments can never be written down.
Instead, it questioned whether the write-down in this particular case followed the necessary regulatory and legal process.
In simple terms, the issue became less about whether losses could be imposed on AT1 investors and more about who had the authority to impose them and when that authority could legally be exercised.
What Does the Supreme Court Ruling Mean for Yes Bank?
The immediate consequence is that the 2020 write-down can no longer simply be treated as final.
The affected AT1 instruments effectively return to the bank’s capital structure, although the precise financial and legal treatment continues to matter.
Yes Bank has estimated that reinstating the ₹8,415 crore principal could reduce its CET1 ratio by approximately 250 basis points based on June 30, 2026 figures. On a pro-forma basis, this could bring CET1 down to around 11.5%.
However, the bank’s overall Tier-1 ratio is expected to remain around 14%.
Why?
Because the transaction partly changes the composition of capital rather than simply eliminating capital. An amount previously reflected within common equity effectively returns to the AT1 layer.
For investors evaluating banking stocks, this distinction is important because CET1 represents the highest-quality form of regulatory capital and provides the strongest cushion against future losses.
Does Yes Bank Have to Pay ₹8,415 Crore Immediately?
Not necessarily.
AT1 bonds are perpetual securities, so reinstating them does not automatically mean the entire ₹8,415 crore principal must immediately be repaid in cash.
This is one area where some headlines can create confusion.
Yes Bank has said the Supreme Court ruling does not itself direct an immediate cash repayment of the full principal. The bank is examining the judgment and considering further legal options.
The bigger unresolved issue may instead be coupon payments.
The Supreme Court said coupon payments should continue according to the terms contained in the bonds’ information memoranda.
Because AT1 coupon structures can be discretionary and non-cumulative, determining what is payable for past periods may require further interpretation.
That uncertainty is financially significant.
Could Missed AT1 Coupons Create a Bigger Liability?
Potentially.
Some analyst scenarios have estimated accumulated coupons since 2020 at approximately ₹5,090 crore. If both the ₹8,415 crore principal adjustment and these past coupons ultimately affected shareholder funds, the total impact could become substantially larger.
One scenario cited by analysts estimated that Yes Bank’s net worth could fall by approximately 16% if only the principal were recognised, and by as much as 26% if accumulated coupons were also included. Under the more severe scenario, CET1 could fall towards 10%.
These remain scenarios rather than a final confirmed cash liability.
CRISIL Ratings has separately estimated an accounting impact of around ₹6,200 crore after tax from recognising the AT1 liability. It said that if the bank chose to service coupons for all prior periods, CET1 could decline further towards 10%, although the rating agency believes Yes Bank should be able to absorb the impact through internal accruals and potential capital raising.
That distinction between a legal ruling, accounting recognition and an actual cash outflow is essential when assessing the impact on the bank.
Why Does This Matter for Yes Bank Shareholders?
The biggest concern for shareholders is not simply the existence of the bonds.
It is the possibility that restoring value to AT1 investors reduces the capital cushion available to equity holders.
When the bonds were written down to zero in 2020, the corresponding loss effectively disappeared from the AT1 layer of Yes Bank’s balance sheet. Reversing that treatment now reallocates part of the bank’s capital back toward AT1 instruments.
A lower CET1 ratio does not automatically imply that the bank is financially unstable.
Yes Bank’s estimated post-adjustment ratios would still remain above regulatory minimums under the scenarios currently discussed.
However, lower common equity capital can reduce flexibility.
Banks require capital to expand their loan books, absorb unexpected losses and support growth. If more capital must be allocated toward resolving the AT1 issue, management may have less room for aggressive balance-sheet expansion unless additional capital is raised.
This is why investors analysing a bank should not look only at earnings growth. Capital adequacy, asset quality and risk buffers matter equally.
The broader lesson is similar to evaluating any investment: return should always be considered alongside risk. Alice Blue’s guide to the SEBI Risk-O-Meter explains why risk classification can be just as important as historical returns when assessing investments.
What Does the Ruling Mean for Mutual Fund Investors?
The story looks different from the bondholder’s side.
Several mutual funds and institutional investors held Yes Bank AT1 bonds before the write-off. Mutual fund exposure alone was reported at roughly ₹2,800 crore around the time of the crisis.
When the securities were written down to zero, affected mutual fund schemes had to recognise the loss.
Some funds had created segregated portfolios, commonly referred to as side pockets, to separate stressed assets from the healthier portion of the scheme.
This matters because any recovery from such assets generally belongs to investors who held units when the segregation took place, rather than investors who purchased the fund later.
If value is eventually restored to those AT1 securities, therefore, some investors who had effectively written off their exposure years ago could potentially receive a recovery.
The episode reinforces why investors should examine the underlying holdings of debt-oriented funds rather than treating all debt investments as equivalent. Alice Blue’s guide on how to evaluate mutual funds using risk, portfolio and consistency explains why returns alone should not drive fund selection.
What Does the Yes Bank AT1 Case Teach Investors?
The most important lesson is that a bond is not automatically a low-risk investment simply because it pays a fixed coupon.
Different debt instruments sit at very different points within a company’s capital structure.
A government security, senior secured bond, unsecured corporate bond and AT1 security may all be described as fixed-income investments, but their loss-absorption characteristics are entirely different.
AT1 bonds are particularly unusual because they combine characteristics of debt and regulatory capital.
Investors receive coupons, but in return they accept the possibility that the investment can absorb losses when the issuing bank becomes financially distressed.
That is precisely why investors should understand the instrument before being attracted by a higher yield.
It is also why diversification matters. Concentrating too heavily in a single issuer, sector or financial product can magnify the impact of an unexpected event. The same principle applies when building mutual fund portfolios, where over-diversification and concentration both require careful management.
Why the Yes Bank AT1 Case Matters Beyond Yes Bank
This ruling could have implications beyond one bank and one group of bondholders.
AT1 capital remains an important part of the global banking system. Regulators use these instruments because they provide an additional loss-absorbing buffer between common equity and more senior liabilities.
For that system to work effectively, however, investors need clarity about when losses can be imposed and which authority is permitted to impose them.
The Yes Bank judgment therefore reinforces two principles at the same time.
First, AT1 bonds remain high-risk securities capable of absorbing losses during a banking crisis.
Second, those losses must be imposed through the regulatory and legal framework governing the instrument.
Both principles matter.
If AT1 investors assume they will always be protected from losses, the securities fail to perform their intended role as bank capital.
But if investors believe the terms can be changed or applied without a clearly defined process, confidence in the market can weaken.
The Bottom Line
Yes Bank’s 2020 rescue succeeded in preventing the collapse of a major private-sector bank.
Six years later, however, one of the most consequential decisions taken during that rescue remains unresolved.
The Supreme Court’s ruling does not eliminate the fundamental risk of investing in AT1 bonds. Instead, it says that the process through which that risk is enforced matters.
For Yes Bank, the immediate challenge is determining how the ₹8,415 crore of reinstated AT1 bonds will be recognised, how future coupons will be serviced and whether any past coupon liability must also be addressed.
For shareholders, the issue is the potential reduction in CET1 capital and the impact that could have on the bank’s future flexibility.
For bondholders, the judgment potentially restores value to investments that had been treated as worthless since 2020.
And for investors more broadly, the lesson is straightforward:
Higher yield usually comes with higher risk — but understanding exactly where that risk sits in the capital structure is just as important as knowing the return being offered.
The Yes Bank crisis may have ended years ago.
The financial consequences of how that rescue was executed are still being worked out.
Blog by Aliceblue News Desk
