After getting it wrong in not allowing RBI to order banks to classify their loans to IL&FS as NPAs, the NCLAT appears to have finally seen sense. NCLAT has now said that while the loans can be classified as NPAs, the banks must make no attempt to recover their loans till further orders. This makes sense since, while banks would normally try and recover their loans by taking IL&FS to the NCLT, given how large the loans are—and the likely haircuts—the government put a new board in place at IL&FS to try and get the best deal possible for IL&FS debtors; if banks were to be allowed to take IL&FS to NCLAT, the Uday Kotak-led team wouldn’t get the time it needs to work out an orderly exit strategy. With the latest NCLAT ruling, banks will now start to make provisions for IL&FS loans and so, even if things don’t work out according to plan, at least the banking sector will be better shock-proofed against possible losses from their IL&FS loans.
Indeed, it is to be hoped the Supreme Court (SC) will also learn a lesson from this as it has, much like the NCLAT, said that bank loans to Delhi Airport Metro Express Limited (DAMEPL) cannot be classified as NPAs till it rules on the matter. As FE has argued earlier, DAMEPL may have valid reasons for why it has not repaid the bank loans it took—it handed back the airport metro line to DMRC and it has not been paid the damages it was awarded against DMRC—from a bank’s point of view, all that matters is that the loan has not been repaid. And even if DAMEPL is to be given time till the other issues are sorted out, surely banks must make provisions in case things still don’t get fixed?
It is also to be hoped that other NCLAT/SC rulings that hit RBI and the banking system will also be reviewed. In the case of Essar Steel, for instance, the resolution is being held up by the NCLAT insisting that the Committee of Creditors ensure that ArcelorMittal pays a greater amount to operational creditors who are getting back a much smaller share of their outstanding in comparison to financial creditors. The SC striking down RBI’s February 12 circular, similarly, has been a big dampener as far as making defaulters repay banks. As in DAMEPL, SC seems to be arguing that if faulty government policy hit firms, they can’t be penalised for not repaying banks; the point, however, is that banks are not a proxy for government, so they can’t be penalised either.
Source: Financial Express, May 6, 2019