IL&FS lenders to continue making provisions for loans to the group

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IL&FS lenders to continue making provisions for loans to the group

Only the current earning flows should be used to make provisions and future cash flows should not be loaded with the obligation to make provisions.

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MUMBAI: With limited prospects for recovery of loans to Infrastructure Leasing and Financial Services (IL&FS) and its subsidiaries in the near term, lenders will continue to make provisions for loans to the group.

In February, the National Company Law Appellate Tribunal (NCLAT) had ruled that lenders can’t treat loan exposures as non-performing assets (NPAs) without the appellate body’s permission.

A two-member bench, headed by NCLAT chairman Justice (Retd) SJ Mukhopadhyay, had ruled on an application moved by some of its lenders.

The order came after the NCLAT on February 11 said subsidiaries of IL&FS would be divided into three categories — Green (companies that can meet all debt obligations), Amber (firms that can meet some debt obligations) and Red (companies that can’t meet any debt obligation).

Senior public sector executives said some exposures were already declared as NPAs for the third quarter ended December 31, 2018, before the tribunal ruling. That status will continue.

Only the current earning flows should be used to make provisions and future cash flows should not be loaded with the obligation to make provisions.

Lenders have already been making provisions, given the uncertainly around the timing for resolution of IL&FS group companies, which can meet debt obligations.

Even when resolution happens, there is a high chance that the sale of asset will happen at a discount. So, lenders may never get back their full amount. Therefore, building provisions would reduce the burden at the time of settlement, said the chief finance officer (CFO) of a large public sector bank.

State Bank of India had an exposure of Rs 900 crore to holding companies of the IL&FS group treated as non-performing and the bank has made 50 per cent provision for it. The exposure of the bank’s Rs 2,200 crore to operating entities (special purpose vehicles) is being treated as standard.

Source- Business Standard.