Let green, amber and red classification guide IL&FS resolution, but how can banks be stopped from declaring outstandings as NPA?

Banks, which are staring at a grim prospect of having to write off Rs 30,000 crore from the defaulter IL&FS, are being asked not even to classify any part of the dues as non-performing assets (NPA). The Reserve Bank of India (RBI) norm is to classify a loan as NPA after a 90-day grace period. After the February 2018 circular of the RBI, banks cannot evergreen loans by sanctioning fresh loans in lieu of the stressed loan through thinly-guised stratagems such as Corporate Debt Restructuring (CDR) Strategic Debt Restructuring (SDR) and what-have-you. To be sure, the eventual outcome may involve sacrifice to the bank in some form or the other but at least the accounts meanwhile should state the blunt and unpalatable truth with suitable provisions for the impending loss. But the National Company Law Appellate Tribunal (NCLAT) on 25 February 2019 ruled that accounts of Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries could not be classified as non-performing assets (NPAs) without approval from the tribunal. The Bench observed that the step was being taken in the interests of the resolution plan being carried out by the new board of IL&FS. Hearing an urgent petition moved by the Ministry of Corporate Affairs, the NCLAT had on 15 October, 2018 stayed all proceedings against IL&FS and its 348 group companies till further orders. That too was to facilitate a holistic and comprehensive resolution of the IL&FS crisis at the expert hands of Uday Kotak-led interim board of directors. [caption id=“attachment_5251861” align=“alignleft” width=“300”]  Representational image. Reuters.[/caption] When the now-repealed Sick Industries (Special Provisions) Act, 1985 indulged promoters with automatic stay of all coercive proceedings against the properties of sick companies who more often than not were correspondingly scandalously prosperous, there used to be a howl of protest. To the angry common man, something similar seems to be afoot given the aura of secrecy surrounding the IL&FS resolution process. Be that as it may, it is one thing to protect IL&FS from coercive proceedings by the angry and harried creditors but quite another to pass a gag order, as it were, on banks from recognizing the loan portfolio for what it is—NPA. Why has the Tribunal thrown a spanner in the RBI’s works? The RBI is the banking regulator and its remit extends to providing norms for declaration of NPA and the resultant provisioning for bad debts which might be as high as 25 percent with IL&FS toxic loans. In any case, the declaration of NPA by banks is not likely to result in proceedings under the Insolvency and Bankruptcy Code (IBC) culminating in controlling interest in IL&FS changing hands because the NCLT is already seized of the matter and has chalked out a different course of action for IL&FS perhaps on the ground that it is too big to fall. Why then deny the RBI its legitimate minimalistic role in regulating banks insofar as the NPA menace is concerned? The outstanding loan of the IL&FS group is about Rs 60,000 crore, while the debt is over Rs 91,000 crore. On 11 February 2019, the central government and the new board of IL&FS had submitted an affidavit detailing three categories — green, amber, and red. Sixty-nine firms of the group have been classified under these categories based on their ability to service routine debt obligations. Those companies which had no cash were classified as red. Those with enough to pay secured creditors but not unsecured ones are amber. And, those in a position to pay all creditors are green. The NCLAT has allowed green firms to service debt obligations. Let the colorful classification remain in place but why cavil at, and intrude into the space, of the RBI especially when the accounting exercise is not going to have any financial impact on the defaulter and its associates. One hopes the coddling of IL&FS doesn’t go as far as brushing its NPA under banks’ carpets. (The write is a senior columnist and tweets @SMurlidharan)