RBI has set precedence in LVB bond write-off, will hurt other banks: Report

During the Yes Bank rescue earlier this year also, there was an over Rs 7,000-crore bond write-off, but that involved a different instrument called additional tier-I bonds

Mumbai: The write-off of Rs 318-crore tier-II bonds by Lakshmi Vilas Bank (LVB) ahead of its merger with DBS Bank is a precedent set by the Reserve Bank of India (RBI) and will hurt the private sector lender’s peers, according to a report.

During the Yes Bank rescue earlier this year also, there was an over Rs 7,000-crore bond write-off, but that involved a different instrument called additional tier-I bonds.

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In the case of LVB, which is being merged with DBS in a scheme proposed by the RBI, investments of Rs 318.20 crore in bonds issued by LVB will be written-off, the lender informed the exchanges late Thursday night.

“RBI has set a precedence with the proposed write-off as it’s first time a tier-II bond is being written off,” ratings agency ICRA said in the report on Friday.

The agency added that investors should factor in the risk in Basel-III instruments, as these instruments can be completely written off in case the bank gets into trouble.

“We expect the risk premiums for such instruments to increase for weaker private banks to increase, given this event,” the ratings agency said.
In an exchange filing late on Thursday evening, the bank said the RBI has advised it of the need to fully write down the Series VIII, Series IX and Series X Basel-III-complaint tier-II bonds before the amalgamation with DBS Bank comes into effect on Friday.

“If the relevant authorities decide to reconstitute the bank or amalgamate the bank with any other bank under the Section 45 of the Banking Regulation Act, such a bank shall be deemed as non-viable and both the pre-specified trigger and the trigger at the point of the point of non-viability for write-down of bonds shall be activated.

“Accordingly, the bonds shall be written off before amalgamation or reconstitution in accordance with applicable rules,” according to the terms of the information memorandum of the respective Basel-III Tier-II bonds issued by the bank, LVB said.

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