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Banks seek provision relief on Rs 51,000 cr IL&FS loans

Demand exemption from RBI unless moratorium on the recovery is lifted

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Banks have asked the Reserve Bank of India (RBI) for an exemption from classifying the Rs 51,000 crore loans to the beleaguered infrastructure financier IL&FS as non-performing assets (NPAs) unless the moratorium on the recovery is lifted.

The 90-day moratorium on the loans that began on October 15 will end on January 15.

"Indian Banks Association (IBA) has already submitted the demand on the provision relief to the RBI," said a senior banker who is a part of the consortium that lent to Infrastructure Leasing & Financial Services.

RBI's regulatory prescription mandates banks to create a provision that is equal to 15% of the exposure as a capital buffer once the loan is unpaid for 90 days. This means that the banking system will have to undertake a provision of Rs 7,600 crore by the end of the current fiscal. Troubles for banks began when IL&FS defaulted on its term loan repayments.

"On all our IL&FS accounts, there is a stand-still clause that prevents us from making any recovery efforts. By the end of the financial year, the entire exposure would have turned into an NPA for which we have to set aside capital," said a senior banker. Banks have exposure on the parent company, its subsidiaries and also on the various special purpose vehicles (SPVs).

The Ministry of Corporate Affairs (MCA) had approached the appellate tribunal after the Mumbai bench of the National Company Law Tribunal (NCLT) turned down its plea to extend the moratorium by another 90 days from January 15, the date on which the first moratorium ends. The matter is still pending with the National Company Law Appellate Tribunal (NCLAT) where the banks had opposed the extension of the moratorium.

The new Board led by veteran banker Uday Kotak is trying to sell off the stakes in subsidiaries, real estate and reduce the wage bills to strengthen the cash flows. This will help the company clear the total debt of over Rs 91,000 crore. The subsidiaries on sale are IL&FS Education, IL&FS Technologies, IL&FS Securities and its alternate investment business. The group has also put on the block about Rs 25,000 to Rs 30,000 crore worth of its road assets that account for one-third of its liabilities. For the securities business, the new Board has received more than a dozen expressions of interest, the sale of which is expected to channelise some money to the banks.

While the total borrowings of the IL&FS group are around Rs 91,000 crore, it owes Rs 25,767 crore towards investment in non-convertible debentures by investors, Rs 3,028 crore in commercial papers, Rs 1,707 crore to non-banking finance companies, Rs 1,102 crore to corporates, Rs 9,137 crore to financial institutions and Rs 6,030 crore to foreign banks.

Many of the financial problems of the company arose from poor governance standards and high leverage in a complex web of companies. In the report submitted to a parliamentary committee on December 3, IL&FS Board said that there are significant intra-group financial transactions which resulted in very high group leverage. There was also disproportionate borrowings at IL&FS and IL&FS Financial Services (IFIN) for deployment and on-lending operating companies. IFIN's exposure to internal group companies for FY16-18 was far in excess of permissible regulatory norms.

The key concern of the IL&FS group is the high level of aggregate leverage at the holding company level which is disproportionate to the aggregate economic value of its business assets or cash flows. "This has led to inadequate cash flows impacting its solvency and day to day operations. The mismatch of cash flows is compounded by diverse nature and type of creditors and the structure of the IL&FS group as that increases the difficulties in using surplus cash flow at the operating entity level," the report added.

The Board told the committee in the report that this is the challenge to service the debt at a group-level even if there are some profitable projects in the operating companies below. The Board added that a lot of corporate governance shortcomings led to financial problems. Large parts of the group operated as a single enterprise without boundaries of legal entities and separate management.

A TALE OF DEFAULTS

  • IL&FS’s debt – Rs 91,000 cr
     
  • Banks seek provision relief from RBI on IL&FS loans
     
  • RBI’s regulatory prescription mandates banks to create a provision that is equal to 15% of the exposure as a capital buffer once the loan is unpaid for 90 days
     
  • This means that the banking system will have to undertake a provision of Rs 7,600 crore by the end of the current fiscal 
     
  • IL&FS’s troubles blew up when the institution defaulted on its bond market obligations in late August
     
  • Following the orders of NCLT, a new Board led by veteran banker Uday Kotak took charge on October 4
     
  • New Board discovers that IL&FS is a complex web of 350 subsidiaries
     
  • Board quick to initiate austerity measures
     
  • Asset monetisation programme that will put all its subsidiaries and its SPVs for sale is underway
     
  • Institute of Chartered Accounts of India (ICAI) submits report saying IL&FS auditors fudged the accounts
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