New Delhi, Feb 25 (IANS): In a path-breaking order, the NCLAT on Monday ruled that no bank or financial institution (FI) shall declare the accounts of cash-strapped Infrastructure Leasing and Financial Services (IL&FS) and its group companies as non-performing assets (NPAs) without its prior permission.

The order comes as a big relief to both financial institutions and IL&FS as it would prevent banks from making higher provisioning required for bad assets while also giving the debt-ridden entity more breathing space to find investors and prevent fire sale of companies.

Hearing petitions moved by a group of lenders, the National Company law Appellate Tribunal (NCLAT) bench headed by Justice (Retd.) S.J. Mukhopadhyay said that in the interest of government plan for the resolution of IL&FS Group companies, its assets should not be declared as NPA without its approval.

As per banking regulations, an account is tagged as an NPA when payments remain due for 90 days. This means that NCLAT order now dilutes the provisions of the banking regulations and sets a precedent which could also have a bearing on asset resolution process in other cases.

During the last hearing on February 11, the NCLAT had allowed 22 companies of IL&FS, which were classified as "Green" companies based on their health, to start servicing the debts. It also allowed 133 group companies incorporated outside the country to continue with the resolution process.

The appellate tribunal had also approved appointment of retired Supreme Court judge Justice D.K. Jain to supervise the resolution process of the cash-strapped entity and its group companies.

The NCLAT had allowed IL&FS and its group entities to be classified into three categories - Green, Amber and Red. Green companies are those which can service their debt obligations in normal course of operation, Amber companies can only meet the operational payment obligations and the Red category comprises entities which cannot service their debt obligation even towards secured creditors.

In the case of IL&FS, the NCLAT order has come as a relief for bankers as well, since several of assets were scheduled to be tagged as NPAs in the current financial year. This would have added to the load on banks with higher provision of capital against bad assets. In fact, the Indian Banks' Association had even appealed to the Reserve Bank of India (RBI) for a special dispensation for IL&FS that would have given more time to resolve the asset, but the request was turned down.

Banks have an exposure to the tune of Rs 16,000 crore in Amber assets of IL&FS and a special dispensation here could have prevented fire sale and easier resolution.

The problem at IL&FS started in September when it first defaulted on debt securities in September last year. Subsequently, the government dismissed the board of the group and appointed an interim board headed by Uday Kotak to finalise a resolution plan.

The total debt of the group stands at Rs 91,000 crore, most of this is on the books of subsidiaries and special purpose vehicles. While some of these entities have the ability to pay, others don't.