You are here: Home » Economy & Policy » News
Business Standard

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.

Topics
Lakshmi Vilas Bank | Reserve Bank of India | DBS Bank

Press Trust of India  |  Mumbai 

Lakshmi Vilas Bank
The RBI simultaneously placed in public domain a draft scheme of amalgamation of LVB with DBIL.

The write-off of Rs 318-crore tier-II bonds by (LVB) ahead of its merger with is a precedent set by the (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.

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 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.

Hence, such Basel-III tier-II bonds would need to be fully written down before amalgamation of the bank comes into effect, LVB said quoting Thursday's letter from the RBI.

On Wednesday, the RBI notified the effective date of merger of November 27 soon after the Union Cabinet headed by Prime Minister Narendra Modi approved the Scheme of Amalgamation of LVB with India Ltd (DBIL).

The RBI superseded LVB's board on November 17 after the private sector lender was placed under a 30-day moratorium restricting cash withdrawals at Rs 25,000 per depositor.

The RBI simultaneously placed in public domain a draft scheme of amalgamation of LVB with DBIL.

Started by a group of seven businessmen of Karur in Tamil Nadu under the leadership of V S N Ramalinga Chettiar in 1926, LVB now has 566 branches and 973 ATMs spread across 19 states and Union territories.

With non-performing assets (NPAs) soaring, the bank was put under the prompt corrective action framework of the (RBI) in September 2019.

LVB is the second private sector bank after Yes Bank that has run into rough weather this year. In March, capital-starved Yes Bank was placed under a moratorium. The government rescued Yes Bank by asking State Bank of India (SBI) to infuse Rs 7,250 crore and take 45 per cent stake in the lender.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Sat, November 28 2020. 01:07 IST
RECOMMENDED FOR YOU
.