State-run Bank of Baroda said on August 22 that its board had approved raising funds through the issuance of Basel III-compliant Additional Tier 1 (AT-1) bonds. The bank is expected to raise Rs 2,500 crore in single or multiple tranches.

Bank of Baroda said in a regulatory filing that the bank’s Ways and Means Committee met on August 22 to consider raising funds.

AT-1 bonds are high-yield annual interest-bearing perpetual bonds with no fixed maturity. That’s why they are often called perpetual bonds because they don’t have a fixed term.

Banks issue these to comply with Basel III specifications. The norm came into effect after the 2008 global financial crisis, which caused some banks to fail and pushed many others to the brink.

To comply with the norm and reduce the risk of bankruptcy, banks need to maintain a minimum capital, and one way of doing this is by issuing AT-1 bonds. The high yields offered by banks are the reason for their popularity. Mutual funds use these bonds to give their investors something extra.

AT-1 bonds are issued as call options, meaning each bond will pay interest until its call date – in this case, the issuer (in this case, the bank can call the bond back and repay the lender) date.

The bank reported a 79.3% year-on-year rise in net profit to Rs 2,168 crore in the quarter that ended June, as bad debt provisions fell.

Shares of Bank of Baroda closed at Rs 118.25, down Rs 2.00 or 1.66% on the BSE.