Indian lenders, however, have limited dependence on such securities, Jefferies said in a note.

"Another instance of AT-1 bond write-off questions seniority of claims of AT-1 bond holders and dampens sentiments for AT-1 market issuances," Citi analysts wrote in a note.

AT-1 bonds are hybrid securities which have loss absorbing features and can be written-down under certain scenarios, including a depletion of capital.

The AT-1 bonds of India's Yes Bank were written down in March 2020 after the Reserve Bank of India initiated a restructuring of the lender with some value attributed to the bank's equity.

Despite the YES Bank precedent, Indian banks have raised AT-1 bonds at 65-75 basis points premium over government bonds, Citi said.

Banks AT-1 capital Risk-weighted AT-1 capital

(In billion assets (In as % of RWA

rupees) billion rupees)

Private Banks

HDFC Bank 123 15,363 0.80%

ICICI Bank 51 10,414 0.50%

Axis Bank 48 7,953 0.60%

IndusInd Bank 15 3,225 0.50%

YES Bank -- 2,441 0%

State-run

banks

State Bank of 415 26,940 1.50%

India

Canara Bank 124 5,573 2.20%

Punjab 87 6,361 1.40%

National Bank

Bank of India 29 3,406 0.80%

Indian Bank 20 3,227 0.60%

Source: Jefferies

Indian state-run banks have a higher share of AT-1 bonds as compared to private bank, according to Jefferies.

Since the Yes Bank episode, the issue of such papers has slowed as the investors leaned towards larger, high-quality banks, it said.

"Among banks, top-3 issuers are SBI, HDFC Bank and Canara

Bank with PSU (Public Sector Undertaking)banks having higher contribution from this," the Jefferies report said, adding that smaller banks have a lower contribution from AT-1 bonds. "Local bond markdet investors aren't really seeing risks here for Indian stocks."

(Reporting by Bhakti Tambe; Editing by Dhanya Ann Thoppil)