Home >Industry >Banking >RBI may challenge NCLAT order on classifying IL&FS debt as NPAs

Mumbai: The Reserve Bank of India (RBI) is likely to challenge the National Company Law Appellate Tribunal’s (NCLAT’s) order stating that the debt of all IL&FS group firms should not be declared as NPAs. The move is based on the view that the insolvency court’s decision is tantamount to judicial overreach.

In its order dated 25 February, NCLAT had said due to the non-payment of dues by Infrastructure Leasing and Financial Services (IL&FS) or its subsidiaries, no financial institution will declare the accounts as a non-performing asset (NPA) without the prior approval of the appellate tribunal.

RBI is likely to file a review application in NCLAT this week.

“The court’s order encroaches into RBI’s regulatory domain and this could set a precedent if left unchallenged. These issues fall under the ambit of RBI’s power as the regulator of the banking sector," said a senior RBI official.

RBI has laid down the guidelines to classify an account as NPA under the Income Recognition and Asset Classification norms. Under these guidelines, any account which has missed payment beyond 90 days should be declared as an NPA. Separately, these norms also specify the amount of provisioning a bank has to set aside once it is tagged as an NPA.

Banks had been seeking relaxation in the classification of IL&FS NPAs, as repayments from IL&FS subsidiaries were not coming forth. This request was, however, turned down by RBI as it believed that such special dispensations will ruin the credit culture. Subsequently, NCLT lifted the moratorium on recoveries from special purpose vehicles, which are ring-fenced from the group, and entities that have cash flows coming in.

IL&FS group’s consolidated debt stands at 90,000 crore, of which it owes about 50,000 crore to banks.

In November, RBI deputy governor N.S. Vishwanathan warned it is not the job of banks to bail out borrowers. “Banks are not supposed to be shock-absorbers of first resort of the difficulties faced by their borrowers as banks do not have the luxury of delaying payments to their depositors."

“While powers of...NCLAT to pass any order in interest of justice and for revival of corporates cannot be questioned, the moot question is can banks be forced to make payments even when the account has become NPA. Hence...the banks or RBI can challenge the order dated 25 February on various grounds and not necessarily on judicial overreach. It is for RBI or rather more particularly the banks to decide whether or not to challenge the order, not necessarily only on account of regulatory consequences and provisioning part, but primarily on basic legal issues," said S.D. Kelkar, former chief general manager and head, law, State Bank of India.

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