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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

Lakshmi Vilas Bank | Reserve Bank of India | loan waiver

Divya Patil | Bloomberg 

Governor Shaktikanta Das has pledged to stay accommodative well into 2021 as he tries to dig the economy out of an unprecedented technical recession

India’s smaller 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 on late Thursday said Rs 3.18 billion ($43 million) of Tier 2 bonds of 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 lower especially for the lower-rated private and small banks,” said Ajay Manglunia, managing director and head at JM Financial Products Ltd. “Such lenders will have to rely more on equity raise as investors shall be a bit more skeptical to take risk now.”

Weakening demand for bank bonds will add to pressure on lenders already saddled with one of the world’s worst bad debt piles. also need to boost their capital in anticipation of more soured loans as the fallout of the pandemic batters businesses.

© 2020 Bloomberg L.P.

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First Published: Fri, November 27 2020. 11:40 IST