On November 26, 2020 Reserve Bank of India(RBI) advised Lakshmi Vilas Bank(LVB) to fully write off the Series VIII, Series IX and Series X Basel-III complaint tier -2 bonds worth Rs 318.20 crore, before its amalgamation with DBS Bank India Ltd(DBIL) comes into effect from the appointed date i.e., 27th November 2020. It is to be noted that it is the 1st time a Tier II bond is being written off and so RBI has set a priority to the proposed write off.
- This move comes after LVB has written off its entire equity capital.
LVB had issued 3 tranches of unsecured non-convertible redeemable fully paid-up Basel-III compliant Tier-2 bonds. This will be recovered between the period 2024-25.
i.As per the guidelines of RBI, Basel III-compliant Additional Tier(AT)-1 and tier 2 instruments can absorb losses through conversion into common equity or a write-down.
ii.As per the sources, the bank has a total outstanding Tier 2 bonds worth Rs 368.70 crore, of which instruments amounting to Rs 318.20 crore can absorb losses.
iii.These bonds, issued between March 2014 and June 2017, and matures between March 2024 and September 2025, carries a coupon rate that range between 10.7% and 11.8%.
Basel III-compliant tier-II bonds include a clause that if the relevant authorities have made a decision to reconstitute or amalgamate the bank with any other bank under section 45 of the Banking Regulation Act, these bonds can be written down by activation of the trigger at the point of non-viability.
Gist about Tier 2 Bonds:
i.Tier 2 bonds are components of tier 2 capital, that are primarily for banks. These are debt instruments like loans.
ii.They do not give ownership or voting rights, but offer interest earnings to bondholders or owners. This bond specifies earnings as interest rates.
iii.They come with higher interest rates than other bank investments.
iv.This bond is rarely chosen by investors due to its substantial higher risks
Recent Related News:
On June 26, 2020, the Government notified the new Floating Rate Savings Bonds (FRSB), 2020 (Taxable) Scheme in place of 7.75% Savings (Taxable) Bonds, 2018, with effect from July 1, 2020.
About Reserve Bank of India(RBI):
Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, and M Rajeswar Rao).