MUMBAI: The Reserve Bank of India’s (RBI) decision to write off Basel III-compliant tier 2 bonds of Lakshmi Vilas Bank (LVB) is credit negative for its holders, but is credit positive for bank depositors and senior creditors, rating agency Moody’s said on Tuesday.
Moody's Investors Service said that this event marks the first time that an Indian bank has written down Basel III tier 2 securities and follows the YES Bank write-down of Basel III additional tier 1 (AT1) securities earlier in the year for the same reason.
On 26 November, LVB announced that it has written down in full its Basel III tier 2 securities because the RBI has deemed the bank to be nonviable or approaching nonviability.
LVB had issued three tranches of unsecured non-convertible redeemable fully paid-up Basel III compliant Tier-2 bonds maturing between 2024 and 2025. On 9 October, Care Ratings downgraded all three tranches—of ₹78.1 crore, ₹140.1 crore and ₹100 crore—to B-, with a negative outlook. Care had said these bonds under Basel III have a ‘point of non-viability’ trigger, due to which investors may suffer a loss of principal.
The point of non-viability, which is determined by RBI, is a point at which the bank may no longer remain a going concern on its own unless appropriate measures are taken to revive its operations.
“The write-down of Basel III compliant securities is consistent with the approach regulators use globally to minimize the cost of a bank bailout to taxpayers. However, before these two cases, the Indian regulator had never imposed losses on junior creditors; it has now set a precedence for such future actions,” said Moody’s.
The rating agency added that in previous instances, the central bank protected junior creditors by allowing weak banks to service their contractual obligations on those securities.
“Also, in 2017-18, the RBI permitted several weak banks, which were under the so-called prompt corrective action plan, to buy back AT1 securities to lower the risk of a trigger event occurring under Basel III rules,” it said.
Mint reported on 28 November that LVB’s decision to write down Tier-2 bonds worth ₹318 crore could increase the cost of borrowing for peers, especially the weaker ones.
The development revived memories of YES Bank’s resolution plan in March, when AT-1 bonds worth ₹8,415 crore were written off, upsetting investors. RBI governor Shaktikanta Das said in September that the primary concern of any bank should be to protect depositors’ interest. There are small depositors, middle-class depositors and retired people who depend on bank deposits, Das had said on 16 September.
