RBI asks LVB to write off tier 2 bonds worth ₹318 crore
- According to the bank, these bonds carry a high coupon rate, ranging between 10.70% and 11.80%
- As the liquidity was draining fast, RBI, with a view to protecting the interest of depositors, invoked the provisions of Section 45 of Banking Regulation Act
Mumbai: After writing off the entire equity capital of Lakshmi Vilas Bank following its amalgamation with DBS Bank India, Reserve Bank of India has asked the ailing private sector lender to write off tier -2 bonds worth ₹318 crore from its books.
In a notification to the stock exchange, the bank said that it had issued 3 tranches of unsecured non-convertible redeemable fully paid-up Basel-III complaint Tier-2 bonds which are coming up for redemption between the period 2024-25.
“The Reserve Bank of India, vide their letter dated 26th November 2020 has advised the need to fully write-down the Series VIII, Series IX and Series X Basel-III complaint Tier-2 Bonds before the amalgamation comes into effect from the Appointed date i.e., 27th November 2020,” said the notice.
"We expect the risk premiums for such instruments to increase for weaker private banks to increase, given this event. RBI has set a precedence with the proposed write off as it first time a Tier II bond is being written off. 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, " said Anil Gupta, Vice president ICRA
According to the bank, these bonds, issued between March 2014 and June 2017 and maturing between March 2024 and September 2025, carry a high coupon rate, ranging between 10.70% and 11.80%.
RBI in its letter to the bank said that as per the information memorandum of these bonds, if a bank undergoes reconstitution or amalgamation with any other bank under banking regulation act, then these bonds can be written down.
“Since Section 45 of the Banking Regulation Act 1949 has been invoked and the scheme has been notified, the bank is deemed to be non-viable or approaching non-viability and accordingly the triggers for a write down of Basel III Tier 2 bonds issued by the bank has been triggered,” said the notice
As on 30 September, the net worth of the bank is negative and the bank has been incurring losses continuously since the quarter ended March 2018. The bank is also in breach of prompt corrective action (PCA) thresholds for all the indicators like capital, asset quality, profitability and leverage. According to PCA rules, if a bank is in breach of threshold level 3 of capital, then it is deemed fit for resolution through amalgamation, winding up etc.
The bank made several attempts to raise capital but failed to find any investors. As the liquidity was draining fast, RBI, with a view to protecting the interest of depositors, invoked the provisions of Section 45 of Banking Regulation Act.
Last week the regulator announced a merger of LVB with the wholly owned subsidiary of DBS Bank in India.
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