In October, the government took control of IL&FS, after a string of defaults on debt obligations by the company spooked domestic markets.
The Reserve Bank of India (RBI) has asked lenders of Infrastructure Leasing and Financial Services (IL&FS) to classify loans extended to the bankrupt shadow banking firm as non-performing, two sources with direct knowledge of the matter told Reuters on Tuesday.
While the RBI decision does not come as a big surprise, it means IL&FS's lenders will have to set aside additional capital to provision for the soured loans.
Bad loans at the country's banks reached a record $150 billion at the end of March, with state-run banks accounting for the lion's share. The huge pile of bad debt has hurt the bottom lines of state-run banks and hindered their ability to issue new loans.
In October, the government took control of IL&FS, after a string of defaults on debt obligations by the infrastructure financing and construction company spooked domestic markets.
IL&FS, which has a total debt of Rs 91,000 crore ($12.97 billion), has been trying to sell its assets to repay debt after several defaults forced the government to overhaul its management.
Government-owned firms, including Life Insurance Corp (LIC) and State Bank of India (SBI), own nearly 40 per cent of the company. Japan's Orix Corp has a 23 per cent stake and Abu Dhabi Investment Authority 12 per cent.
Apart from State Bank of India, other domestic lenders include Bank of Baroda, Punjab National Bank, and Union Bank of India, among others.
One of the sources said the RBI told the lenders to book the loans to IL&FS as non-performing assets in the December quarter.
The second source said the RBI's decision was conveyed to banks on Tuesday.
The RBI did not respond to an email seeking comment. SBI and other lenders were not immediately reachable for comment.