Covered bonds are debt securities that banks or Non-Banking Financial Companies (NBFCs) issue with backing from a pool of assets. These bonds ensure that if the issuer defaults, you can recover your investment from the collateralised asset pool.
How covered bonds work
When you invest in covered bonds, the structure provides you with enhanced security through this process:
- The bank or NBFC issues bonds to you and other investors.
- The issuer establishes a cover pool of secured loans as security.
- At maturity, the bank or NBFC repays your principal amount plus interest.
- If the issuer fails to make payments, you can recover your investment from the cover pool.
- The cover pool typically includes secured loans such as housing loans, vehicle loans, gold loans, and other asset-backed lending.
Key advantages for investors
Dual recourse protection: You receive two levels of security with covered bonds:
- Primary recourse against the issuer
- Secondary recourse against the bankruptcy-protected cover pool assets
This differs from secured corporate bonds, which only provide recourse against the issuer.
Higher credit ratings: Covered bonds generally receive higher credit ratings than the issuer's standalone rating due to the additional asset pool security.
You cannot pledge covered bonds as collateral with Zerodha. To view the complete list of instruments you can pledge for margins and their applicable haircut percentages, visit zerodha.com/approved-securities.