Tier-II write-down positive for LVB depositors, senior creditors: Moody’s

The write-down of Lakshmi Vilas Bank’s (LVB) Basel III tier-II securities is credit negative for holders of junior securities because they will lose their investment, but is credit positive for bank depositors and senior creditors because of the loss-absorption capacity provided by tier-II, Moody’s said on Tuesday.

This marks the first time that an Indian bank has written down tier-II securities and follows Yes Bank’s write-down of its additional tier-I (AT-I) 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 analysts wrote, adding, “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.”

Previously, the Reserve Bank of India (RBI) protected junior creditors by allowing weak banks to service their contractual obligations on those securities. Also, in 2017-18, the RBI permitted several public sector banks, which were under the prompt corrective action plan, to buy back AT-I 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 the Banking Regulation (BR) Act, 1949 because the banks experienced a significant deterioration in their solvency and liquidity.

In the case of LVB, on November 17, the RBI invoked Section 45 of the BR Act, 1949, imposed a moratorium on the bank and announced a draft scheme to amalgamate the bank into DBS Bank India, which is fully owned by Singapore’s DBS Bank. On November 25, the government approved the scheme to merge LVB with DBS Bank India and a day later, the RBI lifted the moratorium.