Depreciation of LVB bonds could affect private sector Level II issues – The Financial Express

Depreciation of Lakshmi Vilas Bank (LVB) Level II bonds to zero could deter private sector issuers in the future, market experts have said. The Reserve Bank of India (RBI) decision in this regard is widely seen as a wake-up call to investors who may have lost awareness of the risks associated with Basel III compliant instruments.

The RBI had said in September 2014 that the terms and conditions of all capital instruments other than capital – both additional Tier I (AT-I) and Tier II – issued by banks must include a provision requiring such instruments, at the option of the central bank, to be written off permanently or to be converted into ordinary shares upon the occurrence of the trigger event “point of non-viability (PONV)”. Earlier this year, Yes Bank’s AT-I bonds worth Rs 8,415 crore were reduced to zero as part of the bank’s rebuilding plan.

Market participants said that since the level II exposure written off in the case of LVB is low at Rs 318 crore, there will be little direct impact on the market. However, this development will certainly warn relatively weaker issuers. Ajay Manglunia, Managing Director and Head of Institutional Fixed Income, JM Financial Products, said the move sounds alarm bells for all investors in Basel III instruments. “This move could have an impact on lower rated banks as issuers in the non-PSU arena. Now people are well aware that Basel III compliant bonds have loss absorption clauses to the point of non-viability for any bank, which the RBI can enforce using its powers under banking regulations, ”a- he said, adding that people had previously ignored this aspect of risk.

Rating agencies have also found the weaker private banks to be the most exposed. Anil Gupta, Sector Head – Financial Sector Ratings, Icra, said the RBI has set a precedent with the proposed delisting because it is the first time that a Level II bond has been written off. “Investors should take into account the risk of Basel III instruments, because these instruments can be fully amortized in case the bank has problems. We expect the risk premiums of these instruments to increase for the weaker private banks to increase, given this event, ”he said.