Small lenders to pay the price as RBI writes off debt of Lakshmi Vilas Bank

The Reserve Bank of India on late Thursday said Rs 3.18 billion of Tier 2 bonds of Lakshmi Vilas Bank Ltd. will be fully written down as DBS Group Holdings Ltd

India’s smaller banks will likely face higher funding costs and reduced investor appetite for their bonds just as non-performing loans spread, after the central bank moved to write off debt of an ailing lender.

The Reserve Bank of India on late Thursday said Rs 3.18 billion ($43 million) of Tier 2 bonds of Lakshmi Vilas Bank Ltd. will be fully written down as DBS Group Holdings Ltd. acquires the lender. The announcement comes as a surprise after the RBI-appointed administrator said last week DBS would take over all obligations, including bonds.

“Financing costs may inch up and the appetite shall be