<\/span><\/h2>\n\n\n\nSo, covered bonds, essentially debt instruments issued by banks, non-banking financial companies, or housing finance firms, have a dedicated pool of assets backing them, like home loans, vehicle loans, or gold loans. The thing that sets them apart from your typical NCD is the concept of dual recourse. <\/p>\n\n\n\n
Covered bonds, also known as dual recourse bonds, offer bondholders two avenues to recover their money if the issuer hits financial trouble: direct repayment from the issuer, using its other assets, and, as a backup plan, by liquidating the cover pool that secures the bonds. <\/p>\n\n\n\n
To put it simply: imagine a housing finance company issues covered bonds worth \u20b9100 crore, backed by a \u20b9120 crore pool of home loans. If the company defaults, you’re not left abandoned as a bondholder. The cover pool, which is basically ring-fenced thanks to an equitable assignment of assets to a special purpose vehicle, is still available to you. And here’s the clever part: these assets stay on the issuer’s balance sheet, so they’ve got a vested interest, which discourages them from giving out poor-quality loans. <\/p>\n\n\n\n
This over-collateralization, where there are more assets in the pool than bonds issued, is a major credit enhancement feature and one of the most defining aspects of these bonds.<\/p>\n\n\n\n