Road construction takes place near the IL&FS building in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)

RBI Seeks Modification Of NCLAT Order On NPA Status Of IL&FS

The Reserve Bank of India has moved the National Company Law Appellate Tribunal seeking a modification in an earlier order which restrained banks from declaring accounts of the Infrastructure Leasing and Financial Services group as non-performing assets.

The NCLAT has allowed the intervention by the RBI.

On Feb. 25, the NCLAT bench headed by Chairperson Retired Justice SJ Mukhopadhyay passed an order stating that lenders should not classify any account belonging to the IL&FS group as NPA without prior permission from the appellate authority.

“ ...we make it clear that due to non-payment of dues by the Infrastructure Leasing & Financial Services Ltd. or its entities including the ‘Amber Companies’, no financial institution will declare the accounts of Infrastructure Leasing & Financial Services Ltd. or its entities as NPA without prior permission of this Appellate Tribunal,” the order had said.

While the appellate tribunal did not explain the rationale behind its decision, it put the regulator in a tough spot.

An account is tagged as an NPA when it’s overdue by over 90 days, as per the regulatory guidelines. Once declared as an NPA, the RBI’s Income Recognition and Asset Classification norms require banks to make provisions against the account. In the first year, banks have to set aside 25 percent as provisioning against these accounts.

Prudent practice would call for all accounts which delay interest servicing by 90 days to be tagged as non-performing even if a resolution is underway. An earlier demand by lenders for a stand-still on asset classification had been rejected by the regulator. This meant that banks would have classified a number of IL&FS accounts as NPA in the December 2018 and March 2019 quarter.

The NCLAT’s order put a halt to this process.

The banking sector’s exposure to the IL&FS Group and its entities stands at around Rs 53,000 crore, said Karthik Srinivasan, senior vice president and group head of financial sector ratings at ICRA Ltd. “Few banks have already declared IL&FS as NPA and have made 15 to 30 percent provision against their exposure while some banks have maintained it as a standard asset but have made some provisions on it.”

Also read: How The IL&FS Crisis Took A Toll On Mutual Funds

IL&FS began defaulting on its debt obligations in September 2018 which prompted the government to take over the company and appoint an interim board to finalise a resolution plan. The group’s total debt stood at Rs 91,000 crore as of September 2018.

In an affidavit filed with the NCLAT, IL&FS’ board of directors said that there are 287 companies at the operating level, 14 intermediate holding companies and one parent.

On Feb.11, the NCLAT said that subsidiaries of the IL&FS Group would be divided into three categories—Green (firms that can meet all debt obligations), Amber (firms that can meet some debt obligations), and Red (firms that can’t meet any debt obligations).

The tribunal went on to say that entities classified as green can continuing servicing debt obligations, while others would wait until a resolution plan is finalised.

The NCLAT has set the next date for hearing on March 29, 2019.

If the NCLAT reverses its Feb. 25 order, banks will need to classify the accounts as NPA and as per regulations make at least 15 percent provisions, Srinivasan said.