RBI deadline for resolution of ₹ 3.8 trillion in NPAs ends today

New Delhi: With the deadline set up by Reserve Bank of India (RBI) for resolution of stressed assets worth around ₹ 3.8 trillion coming to an end today, all eyes are on the expected Allahabad high court judgement on a clutch of petitions against the central bank’s 12 February circular.

RBI, in its 12 February circular, tightened norms for settling bad debt by setting timelines for resolving non-performing assets (NPAs). It allowed lenders to initiate insolvency proceedings against defaulting corporates. Although banks were given several options to arrive at a resolution plan, they had 180 days to do so. The central bank also introduced the concept of a one-day default under which banks have to identify incipient stress even when repayments are overdue by a day.

The Allahabad High Court had earlier ordered lenders to avoid acting against power producers after they sought relief against RBI’s new stress resolution norms. Also, in a relief to power producers, the Supreme Court had refused to stop Allahabad High Court from hearing these petitions.

Today also assumes importance for the Indian power sector given that it is one of the highly stressed sectors with close to ₹ 1 trillion of loans having turned sour or been recast. Around 66 gigawatt (GW) capacity is facing various degrees of financial stress. This includes 54.8GW of coal-based power (44 assets), 6.83GW of gas-based power (nine assets) and 4.57GW of hydropower (13 assets).

Also, lenders have an exposure of around ₹ 3 trillion to these assets in the backdrop of slow electricity procurement over the last three to four years. According to RBI, the total outstanding loans of scheduled commercial bank to the power sector (including renewables) stood at ₹ 5.65 trillion as on March 2018.

The vexed issue caught the attention of the standing committee on energy which in its report titled ‘Impact of RBI’s Revised Framework for Resolution of Stressed Assets on NPAs in the Electricity Sector’ earlier this month noted that the new guidelines of the central bank will only deepen the crisis of the electricity sector and said, “The Committee are of the opinion that the constraints of sectoral issues should be taken into account otherwise the whole exercise will remain only a sophistry.”

A total of 34 coal-fuelled power projects, with an estimated debt of ₹ 1.77 trillion, have been reviewed by the government after being identified by the department of financial services. Issues faced by these projects include paucity of funds, lack of power purchase agreements, and absence of fuel security.

Also, there are concerns that stressed projects have drawn bids for around ₹ 35 lakh per megawatts (MW) under the insolvency and bankruptcy code, a fraction of the ₹ 5 crore per MW needed to build them.

“The demand for electricity is said to have picked up pace as reflected in the recent power tariff increases in spot and short term markets. There is likelihood that this stressed capacity may be meaningfully absorbed in power system in next 3 to 4 years. In this light it is extremely critical to preserve the existing thermal power capacity for current and future economic benefits,” the standing committee on energy said in its 40th report.

India’s electricity demand is expected to go up with the Centre setting up a December 2018 deadline to provide electricity connections to more than 40 million rural and urban households under the ₹ 16,320 crore Saubhagya scheme.

Given the stakes involved, the state-run Rural Electrification Corp. Ltd (REC) has identified projects with a total debt of around ₹ 1.8 trillion as part of Power Asset Revival through Warehousing and Rehabilitation, or ‘Pariwartan scheme, to warehouse stressed power projects totalling 25,000 MW under an asset management firm to protect the value of the assets and prevent their distress sale under the insolvency and bankruptcy code till demand for power picks up, Mintreported on 21 June.

Also, the State Bank of India (SBI) is in advanced stages of the resolution process under its SAMADHAN scheme wherein 10 power assets have been referred.

Any substitution of fuels for cooking, transportation and heating will improve India’s per capita power consumption of around 1,200 kilowatt hour (kWh), which is among the lowest in the world. According to the government, the Saubhagya scheme will require an additional 28,000MW of power, considering an average load of 1 kilowatt (kW) per household for eight hours a day.

Such projections would certainly help, if only the resolution exercise would be as easy a model to emulate.