RBI to NCLAT: Banks must mark IL&FS accounts as NPAs after default

By: | Published: April 17, 2019 2:08 AM

The appellate tribunal, however, said there appeared a conflict between this RBI norm and the Insolvency and Bankruptcy Code (IBC) rule that a company should continue as a going concern till a resolution of its stress is found under the Code.

RBI to NCLAT: Banks must mark IL&FS accounts as NPAs after default RBI to NCLAT: Banks must mark IL&FS accounts as NPAs after default

The RBI on Tuesday told the National Company Law Appellate Tribunal (NCLAT) that it was imperative on part of the banks to declare a loan account as NPA in case of default exceeding 90 days, showing its steadfastness in protecting its regulatory mandate which has recently faced some challenges from the judiciary and the quasi judiciary.

The appellate tribunal, however, said there appeared a conflict between this RBI norm and the Insolvency and Bankruptcy Code (IBC) rule that a company should continue as a going concern till a resolution of its stress is found under the Code.

“How can it continue as a going concern if you declare its assets as NPA? Is it not contradictory to the provisions of IBC?” NCLAT chairperson
Justice SJ Mukhopadhyay asked.

On February 25, NCLAT observed: “We make it clear that due to non-payment of dues by the IL&FS or its entities, including the ‘Amber Companies,’ no financial institution will declare the accounts of IL&FS or its entities as NPA without prior permission of this appellate tribunal.” It offered moratorium on repayment of loans regarding the accounts of IL&FS and its over 300 group companies.

Seeking clarification on the order since banks were closing their accounts for FY19, RBI counsel Gopal Jain said banks cannot be relieved of their duties of reflecting these NPAs in their accounts.

According to him, true reflection in the books is important for fair accounting because it has early warning signals. “You have to know the real state of the accounts of the banks otherwise, if you do not show NPA, you would constantly booking interest on the loan principal. You would have a rosy picture,” he argued.

Recently, the SC quashed the RBI’s controversial February 12 circular that sought a one-day default rule for firms and sought to quicken the process of salvaging stressed assets under the insolvency code.

The RBI’s February 12 circular stipulates a one-day default rule on term loans — a borrower who misses repayment even for a day will be treated a defaulter and banks need to finalise a resolution plan for defaults of over `2,000 crore within the next 180 days, failing which insolvency proceedings will start.

RBI had earlier submitted that preventing banks from following its prudential norms — the latest master circular of which was issued on July 1, 2015 — “shall have far-reaching overall repercussions and cascading effects on the banking sector of the country and the interest of the depositors could be jeopardised”.

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