Mumbai: Top lenders to Infrastructure Leasing and Financial Services Ltd (IL&FS) struggling to recover 60,000 crore dues have come together to seek easier provisioning norms for loans given to the cash-strapped conglomerate. The lenders, which have banded together under the Indian Banks Association (IBA), have two demands of the Reserve Bank of India—a six-month moratorium before bad loan provisioning norms kick in and; after the moratorium, application of standard provisioning norms for the IL&FS loans.

According to two people with direct knowledge of the matter, officials of at least 20 banks that have lent to IL&FS met on Wednesday to discuss the challenge of making provisions for 65% of these loans or loans worth 40,000 crore which are expected to become sub-standard by 31 December. Following this, at least 13 banks met IBA officials on Thursday, the people mentioned above added on condition of anonymity.

Banks have been pushed to make this move following the new IL&FS board’s delay in carving out a concrete resolution plan on repaying dues.

“The objective is to save the banks from the large NPA burden on the banking system due to IL&FS loans. The RBI is aware of the issue but a formal recommendation on the matter to protect the banks is yet to go to RBI. IBA today discussed the matter and decided to prepare a list of recommendations on behalf of the banks and send it to RBI on Friday," said the first of the two persons cited above, who attended the meetings on Wednesday and Thursday.

All banks with an exposure of 500 crore to IL&FS and its subsidiaries met the IBA on Thursday, this person added.

The banks which presented their case to the IBA on Thursday include the State Bank of India, Bank of Baroda, Bank of India, Canara Bank, IDBI Bank, Punjab National Bank, Karnataka Babnk, Indian Overseas Bank, Axis Bank Ltd, IndusInd Bank Ltd, Syndicate Bank and Bank of Maharashtra.

An IL&FS spokesman declined to comment, while an email sent to the IBA remained unanswered.

“The banks have unanimously decided that firstly, banks should get a dispensation from the RBI in terms of asset classification with regards to loans to IL&FS and its subsidiaries. For this, the banks want a moratorium of at least six months from the respective dates of defaults on various accounts of IL&FS and its subsidiaries. This will enable banks to avoid classifying loans of IL&FS group loans as sub-standard and, hence, will save them from the provisioning costs," said the first person.

The second recommendation agreed at the IBA meeting is that the RBI must give the banks some relaxation in norms for the cost of provisioning towards sub-standard assets arising from the exposure to IL&FS or its subsidiaries. For this, banks suggest that after the six-month moratorium is over, they should be allowed to apply provisioning norms meant for standard assets on loans given to IL&FS or its subsidiaries.

At present, standard assets attract a provisioning rate of 0.4%, which is what lenders of IL&FS want to apply to IL&FS group loans, subject to RBI approval.

Sub-standard assets (defaulted loans) attract a provisioning rate of 25% in the first year, 40% between the first and the third year, and 100% after three years. These rates will apply on the loans disbursed to the IL&FS group, if the RBI does not agree to their recommendation worked out on Thursday. Hence, at the this rate the banks will have to bare a provisioning cost of 10,000 crore.

Banks and other financial institutions have a total exposure of around 94,000 crore to IL&FS and its 350 subsidiaries.

“Of this, nationalised banks have around 35,000-40,000 crore worth of exposure. Together with private banks, the total exposure of banks is 50,000-60,000 crore," said the second person.

The IL&FS board’s delay in figuring out a way forward has already prompted regulators to take some measures.

On Wednesday, the Securities and Exchange Board of India (Sebi) introduced the concept of segregated portfolio for mutual funds. The mechanism will help mutual funds separate distressed assets from the liquid portion of a mutual fund scheme. The provision will be optional for schemes taking credit risks in their various debt exposures.

A series of downgrades of IL&FS papers in September had forced mutual fund fixed income schemes to take large haircuts on their exposure. In the wake of an uncertain outlook of recovery of their dues, some schemes took the entire haircut, while some took haircuts of as much as 50%.

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