Resolving Power Sector NPAs

Why in news?

The Allahabad High Court hears petition by power companies against RBI's February 12 circular.

What was the circular on?

• It requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days.
• Failing this would result in insolvency proceedings being invoked against the defaulter.
• This would be as per the Insolvency and Bankruptcy Code (IBC) provisions.

What is the ongoing case?

• By RBI's circular, the unresolved accounts would undergo IBC process by the end of August, 2018.
• However, the power sector producers sought relief from the court.
• Power sector is one of the most financially stressed ones.
• It has potential non-performing assets (NPAs) of Rs 2.6 trillion.
• Hence, the Centre called for regulatory relief for the power sector.
• It also sought an extension of the deadline for the sector.
• The issue has thus led to a stand-off between the Central government and the RBI.

What are the centre's views?

• There is evidently lack of structural reforms in the power sector.
• So there is a good chance that power sector assets may not attract reasonable bids.
• Hence, strict adherence to the IBC for power sector can force banks to accept deep haircuts.
• Moreover, power sector has some issues that are unlikely to disappear in a short time.
• These include low power demand, lack of reliable coal supply, etc.
• Given this, the existing power capacity will also be destroyed if liquidation happens.
• On the other hand, recovery rates in the IBC have hovered just around 25%.
• So liquidation will not be desirable in the power sector either for the promoters or the government.

What are the alternatives?

• The government as well as other related agencies have suggested various ways to deal with power sector NPAs.
• The government has come up with the Sashakt scheme which is likely to bring relief to banks.
• Banks can get rid of the NPAs from their books quickly while hoping for better recovery rates in the future.
• State Bank of India and Power Finance Corporation, with the highest exposure to the power sector, have suggested the Samadhan scheme.
• The Rural Electrification Corporation has suggested the Pariwartan scheme.

What is RBI's stance?

• The RBI is not convinced with the proposed alternatives.
• It relies on the two key promises that IBC holds when it comes to NPAs resolution.
• One, IBC provides the framework for getting the best possible price of assets.
• Secondly, its application ensures a speedy resolution of assets that would have been otherwise stuck in litigation for decades.
• Given these, RBI asserts that nothing should be done to dilute the IBC process.
• So the central bank says that the law should be applied equally to all.
• Accepting exception for the power sector would invite more such requests.
• This is especially true, given the rising mountain of NPAs across different sectors.

Source: Business Standard

Quick Facts

Samadhan Scheme

• Samadhan is the Scheme of Asset Management and Debt Change Structure.
• Under this, the bankers' consortium shortlisted 11 power plants with an overall capacity of over 12 GW, which are either complete or are nearing completion.
• The idea is to carry out an assessment of what would be sustainable debt of these assets.
• The remaining debt which is unsustainable would be converted into equity to be held by the banks.

Pariwartan Scheme

• 'Pariwartan' refers to 'Power Asset Revival through Warehousing and Rehabilitation'.
• This is a Central Government's scheme to protect the value of stressed power projects and prevent their distress sale under the IBC.
• The State-run Rural Electrification Corporation (REC) has identified projects with a total debt of around Rs 1.8 trillion.
• These stressed projects will be housed under an asset management and rehabilitation company (AMRC) that will be owned by financial institutions.
• The promoter’s equity will be reduced to facilitate a transfer of management control and the lenders will convert their debt into equity.
• The AMRC will charge a fee and help complete the projects that are stranded for lack of funds.