Saraswat Cooperative Bank’s High-risk Bond Offering: No Credit Rating and in Physical Form
Updated at 19.10 on 9 March 2023 to include a response from Saraswat Bank and the author
Saraswat Cooperative Bank Ltd is a scheduled bank. It is a ‘cooperative society’. It has recently released an ‘offer document’ that is for a Rs400 crore bond issue. The bonds have a life of 10 years and promise interest at 10% per annum, payable quarterly.
The offer document bears the title: ‘Issue of Long Term Subordinated Bonds (LTSB) 2022-23 (Series-VII) as a Part of Lower Tier - II Capital’. It is addressed to the public at large. 
Typically, every depositor in a cooperative bank has to become a ‘member’ of the cooperative society and subscribe to shares. However, this LTSB is not a deposit and, hence, anyone who wishes to buy need not be a member. The minimum amount has been set at Rs50,000. The document says that this issuance has the ‘approval’ of the Reserve Bank of India (RBI). This issuance seems targeted at its deposit- holders and the general public. The interest rate is very high and it indicates the riskiness of the investment. There are some things about the issue that the investors should be aware of before they get carried away by the Bank's name and the high interest rates and put their money:
1. The investment receipt will be in the physical form of a certificate! Years ago, even company fixed deposits have moved to the electronic format and this Bank wants to give a 10-year debt in paper form. Over 10 years, one can lose the papers. Getting a duplicate or filing a claim for the final maturity would be a nightmare. And, if the investor were to die before maturity, his successors would have to know where to find the certificate, even if they know that there is such an investment. RBI should not have permitted this. 
2. There is no credit rating. This is surprising and questionable. 
3. The debt is not transferable. This means that the original investor has to hold this to maturity.  
4. There is no surrender mechanism, no loan facility, etc. In short, it is a terrible form of investment with no exit.
5. Since it is a ‘subordinated’ debt, please understand that in case of the Bank going bust, the bond-holder will be subordinated to the claims of depositors and other creditors. 
6. There is no deposit insurance cover for this.
7. The scariest thing is clause X in the offer document that reads as under
“Further, redemption would be permitted only if the bank’s CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank.”
Clause XXV further emphasises that
 “Repayment of Long Term Subordinated Bonds (LTSB) at maturity shall be made by the bank only after seeking prior permission of the Reserve Bank of India.”
8. Unlike most debt issues, there is no ‘trustee’ who can act in investor interest. The investor has no one to safeguard his interest or give him an early warning. Not that an early warning signal means anything, with so many restrictive conditions on repayment.
9. There are also very onerous conditions on ‘nominations’ and payout of maturity claims on the death of a lender. 
This kind of a very high-risk debt instrument should not be retailed. Yes, Saraswat Bank is more than a hundred years old, has a good record of profit and so on. If they are so good, why did they not seek a credit rating?
The other thing that RBI could have done was to keep the minimum amount at Rs25 lakh or Rs50 lakh. This would have taken the retail away from risk. Also, RBI should wake up and not permit issues in the form of physical certificates. There could be forged certificates that can surface after 10 years! How does an investor know it is genuine? 
The structure is terrible and the risk is high. Tomorrow, if there is some trouble in the Bank, the RBI could do what it did in Yes Bank by simply annulling these bonds. And, since they hold the power to withhold repayment, the investor in these bonds is going to need a lot of good fortune to get his money back. RBI has to get its act together and ensure that such kinds of instruments are sold only to high-net-worth and qualified investors.
In a release, Gautam E Thakur, chairman of Saraswat Bank, says, "Within one and a half months of announcing the present issue of Rs400 crore for subscription, more than 87% of the bonds amounting to Rs349 crore have been enthusiastically subscribed. Out of this subscription, 90% of the subscription amounting to Rs323 crore is by our existing depositors and shareholders. This shows their faith and confidence in the management of the Bank."

"The allegation that the interest rate for these bonds 'is very high' is false and misleading. As RBI has increased the repo rate six times, aggregating to 250bps (basis points) in the current financial year, there is an upward trend in the interest rate scenario. Interest rates on fixed deposits are very competitive, and the range is between 7.50% pa (per annum) to 8.00% for a period of one to three years. In accordance with the RBI guidelines, the bond has a maturity of 10 years with no early redemption or borrowing facility against the same. In view of this, the interest rate offered is reasonable and in tandem with the market trend."

"At the time of subscription, the Bank obtains instructions for crediting the proceeds to bank accounts on maturity and credits the same accordingly, even without calling for the physical receipt of the bond. Hence the presentation of physical receipt is not a necessary condition on maturity."

"The Bank obtains nominal membership from the investor to enable him/her to nominate a successor of the bond. In case of the death of the investor, the nominee on the production of valid KYC (know-your-customer) documents can substitute his/ her name in place of the original investor. The amount is then paid to the nominee on the maturity date."

According to Saraswat Bank, "The characteristics of the bands, viz. non-transferability, no surrender mechanism, no loan facility and its classification as a subordinated debt are in accordance with the RBI guidelines and are highlighted in the offer document, which is approved by the RBI. It is also to be noted that deposit insurance is not applicable since it is a Bond and not a Deposit. Credit rating is not mandatory as RBI guidelines don't stipulate the same in case of LTSB issue of cooperative banks."

Response from the Author...
This is not about Saraswat Bank. I have used this offer document as an example because it reached me.

The main issue is about such kind of an instrument being sold to retail without their complete awareness.

Saraswat Bank has survived for over a hundred years and does not seem to have missed dividends in any single year (except for the COVID year as a matter of prudence) and also seems to have a track record of meeting its obligations. The very fact that they have been around for over a hundred years, without any public scandal or restructuring, is a credit to their strength and credibility.

However, my objection is to this kind of instrument being 'sold' to the retail. Many of them would be depositors and senior citizens. The instrument is also being issued in physical format.

My plea is to the RBI. Please do not make it legal for such instruments to be sold to the retail. They are not capable of knowing all the consequences. And further, it will also force the bank employee to force-feed this to their depositors and borrowers. And if you still want to push it down the throat of the retail, please raise the minimum subscription to at least Rs25 lakh or Rs50 lakh so that the risk is confined to the better off.

Why does RBI want to restrict 'transferability'? What is wrong if this is a tradeable paper? It will then bring in mutual funds, insurance companies and provident funds also in.

The retail investor is best kept away from these issues.

For any such issue, RBI should ensure the following:
1.    Mandatory credit rating.
2.    A trustee like a debenture trustee.
3.    Issue the instrument only in demat.
4.    Since there is no transferability, insist on the nominee.
5.    Highlight that, unlike fixed deposits, you cannot use this as a pledge to borrow. With a good credit rating, a bank can reduce costs by placing such instruments with ultra-high-net-worth individuals (UHNIs), trusts and other institutions. Why does it want to go retail? The Bank will probably be able to place it with institutions at a lower cost.
1 year ago
Most of the so called not necessary requirements are attributed to RBI regulations and permissions. Since almost all the time RBI or its so called watch-dog unit does not refute it, one needs to be extra careful. Other public sector banks have also floated these kind of unsecured bonds F1. One's protection is limited to only 5lacs. Difficult times ahead.
1 year ago
Risk apart 10% for 10 years is a good deal considering that interest rates would reverse their journey within another 2-4 years.
1 year ago
The branch has informed today that the details collected for interest credit will also be used for maturity payment, although it is not printed on the receipt that auto-repayment will be triggered on maturity date. They also clarified that discharged original bond receipt will not be called for as was erroneously mentioned to me. And no indemnity bond will be asked for if original is misplaced.

It is still not clear why one has to become a nominal member even after being a shareholder.
Replied to Deviprakash comment 1 year ago
Good to see this response. Hope they put it up on their website also so that everyone is assured
1 year ago
The Author's response says...."Saraswat Bank has survived for over a hundred years and does not seem to have missed dividends in any single year (except for the COVID year as a matter of prudence)...."
Being a shareholder for long, I wish to mention that the dividend was not paid in Covid year due to RBI restricting banks from paying any dividends. No co-operative bank paid in that year. Some of them made up for this miss by extra payment in the following year.

However, it is not clear why the bank is asking for existing members to lien their shares till the Bonds are unpaid (maturity). Or to pay 118/- to become a nominal member again. Can one have 2 memberships? Particularly for us account holders who are regularly asked to update their KYC.

The bank has not collected any repayment instructions from me while issuing these claimed by the Chairman in his reply.
Replied to deviprakash comment 1 year ago
Thank you
Replied to balakrishnanr comment 1 year ago
Or maybe put a rubber stamp on the bond, saying that this will be auto-redeemed on maturity. Then it becomes almost as good as D'mat as long as there is an active bank account linked to it.
Kamal Garg
1 year ago
Complex, extremely investor unfriendly and bizarre issue.
1 year ago
Thanks for this eye opener on Saraswat Bank's LTSB issue. It is scary. Isn't it mandatory for borrowers from public to have credit rating? You are absolutely right as to why it is issued in physical form and risk involved. Overall this exposes the vulnerability.
1 year ago
Well researched! The recommendations are also germane.
Thank you to the author for this. Why doesn’t the so called pink papers report this?
ML should consider writing to the relevant authorities to treat these kinds of restrictive instruments at par with the new norms for AT1 instruments.
btw this article itself is sufficient in terms of clarity of content to take cognisance of.
1 year ago
There is no stipulation in respect of Co-op banks that depositor should be a shareholder. It is so in respect of borrower.
Replied to vtgokhale comment 1 year ago
In these bonds you have to be a shareholder else you can't make a nomination! Bizarre that RBI says this is ok and approved.
1 year ago
Finance Ministry should immediately look into it immediately and bring in restrictions as per the norms. Action should be taken against RBI for allowing such bonds.
1 year ago
Finance Ministry should immediately look into it immediately and bring in restrictions as per the
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