Covered bonds are debt securities that are collateralized against a pool of assets and are issued by a bank or a non-banking financial company (NBFC). In the event that the issuer fails to pay, the money can be reclaimed from the pool of assets.

A covered bond's structure is described below.

1. Bonds are issued to investors by a bank or a non-bank financial institution (NBFI).
2. A cover pool of secured loans is also obtained as a recourse (safety precaution).
3. At the conclusion of the bond's maturity, the bank or NBFC pays the principal plus interest to the investors.
4. The sum can be reclaimed from the cover pool if the bank or NBFC fails to make the payment.
Housing loans, vehicle loans, gold loans, and other secured loans make up the cover pool.
Unlike secured corporate bonds, which only have recourse against the issuer, covered bonds have two types of recourse: first recourse against the issuer and bankruptcy-protected recourse against the issuer's assets (Cover Pool). Covered bonds are supposed to give a credit rating uplift, over and above the issuer's credit rating, due to the coverage provided.