Are Coco Bonds an answer to banks problems?

Public Sector Banks (PSBs) need money. 

Moody’s Investors said that the government will need to infuse nearly Rs 1.2 lakh crore into public sector banks by 2020. This is needed in order to restore the health of their balancesheets and tide over bad loans issue. 

India Ratings believe that these banks need more capital. It, however, also said the banks can be given this extra cash by way of Additional Tier 1 bonds. 

Contingent convertible bond (coco bonds), commonly known as Additional Tier 1 capital bond (AT1 bonds).

What are AT1 bonds?

Banks lend to businesses in order to make money by way of interest earnings. However, restructuring process, in case a business defaults on its payments to bank, is a long drawn process. Banks now have the option of taking over management control in case a company fails to repay its loans. 

This is where coco bonds come in the picture. 

To cut short the negotiation time and the process, banks issue coco bonds. If a company defaults on a loan, it triggers certain conditions which when met, automatically coverts the debt features of the loan into equity. 

Simply put, banks can takeover the control of companies with ease.