(Source: IL&FS Annual Report)

Banks Unlikely To Take A Hit From IL&FS Loans In September Quarter

Indian lenders are unlikely to reclassify loans given to Infrastructure Leasing & Financial Services Ltd. in the September quarter, according to bankers with at least three large banks. Banks are awaiting clarity from the newly appointed board on the resolution plan and from the regulator, before they decide on how to treat these loans. Any adjustments required will likely reflect in the December quarter, they said.

Banks have a loan exposure of about Rs 50,000 crore to IL&FS and its 348 associated companies, said two people familiar with the account. The IL&FS annual report shows that its consolidated debt obligations exceeded Rs 91,000 crore, as of March 2018.

According to bankers from three large banks, who spoke on conditions of anonymity, IL&FS and its subsidiaries have made most repayments due till August. As such, the account is not yet due to be classified as a non performing asset. An account is classified as an NPA, when repayments are due for over 90 days. Even so, banks can individually choose to increase provisions against the account in keeping with prudent banking practices.

Since the defaults on the account emerged in July-August, banks would need to classify the account as an NPA only in the October-December quarter, said Anil Gupta, head of financial sector ratings at ICRA.

Public sector banks have the highest loan exposures against IL&FS and its subsidiaries. Banks like State Bank of India, Bank of India, United Bank of India and IDBI Bank are among the lenders with large exposures, as per data collated by Ministry of Corporate Affairs.

Banks Unlikely To Take A Hit From IL&FS Loans In September Quarter

IL&FS and some of its subsidiaries have defaulted on commercial paper and other debt instruments over the months of August and September. Following these defaults, rating agencies downgraded the rating issued to some of these instruments to default or ‘D’. In a bid to control the situation, on Oct. 1, the government decided to supersede the company’s board and appointed a new seven member board led by veteran banker Uday Kotak.

Banks holding debt securities of IL&FS and its group companies would need to mark them down due to the ratings downgrade. This could result in some mark-to-market hit on the bond portfolio of banks.

A senior banker with a large public sector bank said that this is probably the first time that they are facing a situation where a AAA rated company has been downgraded to default in a matter of weeks. Banks are still waiting for cues from the company’s new board and the regulator on how to treat the exposure to IL&FS, the banker added.

The new board is yet to meet with lenders on the future course of action on these loans. Banks are also yet to hear anything from the Reserve Bank of India regarding specific provisions to be made against these loans.

On Monday, SBI Chairman, Rajnish Kumar said that the bank was not very worried about the exposures in IL&FS. “We are not worried about SBI's investments in IL&FS. SBI has 6 percent exposure in IL&FS. There is not much reason for concern. The new IL&FS board chief Uday Kotak is taking appropriate actions,” news agency ANI quoted Kumar as saying.

Speaking to the press after the maiden meeting of the new board on Thursday, Kotak had said that they were still in the process of ascertaining the facts regarding IL&FS’ debt obligations. Once the board has all the facts, it will find ways to restructure these obligations.

“We are looking at all the obligations and the financing raised by the company, which includes different kinds of debt (like) secured, unsecured, bonds, loans, commercial papers, the entire range of debt. There are also other instruments like preference capital, which sits between debt and equity. There is a reasonable amount of that. There are also off balance sheet items, which are contingent liabilities and may become actual liabilities,” said Kotak.

Dues pending from IL&FS could add further stress to bank balance sheets which are already reeling under bad loans emerging from their corporate portfolio. As of June 2018, gross NPAs on the books of listed banks had crossed Rs 10.3 lakh crore.