The Reserve Bank of India (RBI) on Tuesday told the National Company Law Appellate Tribunal (NCLAT) that banks had an obligation to mark bad loans as non-performing asset (NPA) after the default of 90 days and that the lenders could not be relieved of the same.

The banking sector regulator has moved the NCLAT seeking a modification of its February 25 order in which the appellate tribunal had said that accounts of the Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries could not be classified NPAs without approval.

Reflecting such loans as NPA is important on the books of banks as it acts as an early warning signal, senior advocate Gopal Jain appearing for the RBI said.

“You have to know the real state of the accounts of the banks. Otherwise, if you do not show NPA, you would constantly be booking interest on the loan’s principal amount. It would be a very rosy picture. The whole thing is to have a transparent and fair accounting system, so that the health of the institution is not affected,” Jain said.

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The banking sector regulator said it was not on the question of the resolution process of the IL&FS and just wanted a modification on the order, which would allow banks to record NPAs on their books in terms of the master circular, which was also upheld by the Supreme Court.

A two-judge Bench of the NCLAT led by Chairperson Justice S J Mukhopadhaya said that the appellate tribunal was not on the question of whether the RBI and the banks had those powers in terms of the circular, but would only decide if the accounts could be declared NPA.

“Nobody can challenge your circular as bad. We cannot say anything about your circular. We will be deliberating whether it can be declared NPA. The moment it is declared NPA, none of the (IL&FS) companies will go for resolution,” the two-judge Bench observed. The case would be next heard on April 29.

The outstanding loan of the IL&FS group is about Rs 60,000 crore, while debt is over Rs 91,000 crore. Hearing a plea moved by lenders, the Bench observed that the step was being taken in the interests of the resolution plan being carried out by the new board of the IL&FS.

On February 11, the central government and the new board of the IL&FS had submitted an affidavit detailing three categories — green, amber, and red.

Sixty-nine firms of the group have been classified under these categories based on their ability to service routine debt obligations. Companies with no cash and not in a position to pay any creditor were classified red. Those with enough to pay secured creditors, but not unsecured ones, amber. Moreover, the NCLAT has so far allowed green firms to service debt obligations.