LVB bond, stock write-offs negative for investors, good for depositors: Moody’s

Chennai: The government decision to write off bonds and stocks of Lakshmi Vilas Bank as part of its merger with DBS Bank are negative for investors holding these instruments since this leads to loss of their investment. However, it is positive for the bank’s depositors and senior creditors since the incidence of loss will be lesser on these two groups of stakeholders, said ratings agency Moody’s Investors Service.
The rating agency said the LVB case was the first such incident that stocks of an Indian bank have been written off.Earlier in the case of Yes Bank, only the Additional Tier 1 (AT1) bonds were written off during the lender’s reorganization in May this year. This write-off of stocks of a lender was consistent with the approach regulators use globally to minimize the cost of a bank bailout on taxpayers. It is to be noted that before these two cases, the banking regulator has never imposed losses on bond holders, and has now set precedence for such future actions, according to Moody’s report.
Under the government-backed RBI plan for LVB, announced on November 26, the lender’s Basel III Tier 2 bonds, aggregating Rs 318 crore, were completely written off after the central bank deemed the private lender to be non-viable or approaching non-viability. “As per rules of Indian Basel III compliant AT1 and Tier 2 securities, securities or bonds will be written down before authorities can step in to support a bank,” the release from Moody’s said.