Definition
Subordinated Debt
Subordinated debt is borrowing that ranks below senior creditors and depositors in repayment, often issued by banks and NBFCs to raise Tier 2 capital.
Because subordinated (or 'sub-debt') holders are paid only after senior lenders in a wind-up, the instruments carry higher coupons. Banks issue Basel III-compliant sub-debt to bolster Tier 2 capital without diluting equity.
NBFCs also raise subordinated debt, which can count toward their regulatory capital under RBI norms. For investors, the extra yield compensates for the lower claim priority and, in bank instruments, the risk of write-down at the point of non-viability.
Related terms
- Tier 2 CapitalTier 2 capital is a bank's supplementary, gone-concern capital, including subordinated debt and certain reserves, that absorbs losses only if the bank is wound up.
- AT1 Bonds (Additional Tier 1)AT1 bonds are perpetual, loss-absorbing instruments that count as Additional Tier 1 capital for banks and can be written down or have coupons skipped under stress.
- Point of Non-Viability (PONV)The Point of Non-Viability is the trigger at which the RBI can require a bank's AT1 and certain Tier 2 instruments to be written down or converted to equity to keep it afloat.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.