The decision to write down tier-II bonds of Lakshmi Vilas Bank before its merger with DBS Bank India Ltd is credit positive for depositors and senior creditors due to loss-absorption capacity of such instrument. However, the move is credit negative for holders of LVB’s basel III compliant bonds as they will lose their investment, according to rating agency Moody’s.
Terms and conditions of Indian Basel III compliant AT1 and tier-II securities specify that such securities will be written down before authorities can step in to support a bank.
On November 26, LVB announced that it has written down in full its Basel III tier-II securities because the Reserve Bank of India (RBI) has deemed the bank to be non-viable or approaching non-viability.
This marks the first time that an Indian bank has written down Basel III tier-II securities and follows Yes Bank’s write-down of Basel III Additional tier 1 (AT1) securities earlier in the year for the same reason.
The write-down of Basel III compliant securities is consistent with the approach regulators use globally to minimise the cost of a bank bailout to taxpayers, Moody’s said.
However, prior to these two cases, the Indian regulator (Reserve Bank of India) had never imposed losses on junior creditors. It has now set a precedent for such future actions.
Previously, the RBI 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.
The RBI rescued the troubled LVB and Yes Bank by invoking Section 45 of India’s Banking Regulation Act 1949 as they experienced a significant deterioration in their solvency and liquidity.