Lakshmi Vilas Bank's Rs 318.2 cr worth of Tier-II bonds to be written down

Anil Gupta, vice-president and sector head, financial sector ratings, ICRA, said RBI had set a precedence with the proposed write-off as it was the first time a Tier-II bond was being written off
Lakshmi Vilas Bank’s Tier-II bonds worth Rs 318.2 crore will be written down before its amalgamation with DBS Bank India comes into effect from Friday (November 27). The step is part of the move to absorb non-performing assets.

The Reserve Bank of India, in its communication to the bank, pointed to rules for writing down Basel-III-compliant Tier-II bonds.

Anil Gupta, vice-president and sector head, financial sector ratings, ICRA, said RBI had set a precedence with the proposed write-off as it was the first time a Tier-II bond was being written off. Investors should factor in the risk in Basel-III instruments, as these instruments could 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”, he added.

If the authorities decide to reconstitute or amalgamate the bank with any other lender under the Banking Regulation Act, 1949, such an entity would be deemed non-viable or approaching non-viability. The pre-specified trigger and trigger at the point of non-viability for write-down of the bonds will be activated. The bonds shall be written down before amalgamation.

“The Reserve Bank of India, vide its letter dated November 26, has advised the need to fully write down the Series-VIII (Rs 78.1 crore), Series IX (Rs 140.1 crore), and Series X (Rs100 crore) Basel-III-compliant Tier-II bonds before the amalgamation comes into effect,” the bank said in a notification to stock exchanges.

The entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank (LVB), stand written off.


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