Home >politics >policy >Govt plans to set up asset reconstruction firms for power, road sectors

New Delhi: The Bharatiya Janata Party-led National Democratic Alliance (NDA) government is planning to set up two separate asset reconstruction companies (ARCs) to clean up bad debts in the power and road sectors that are crucial for reviving and sustaining economic growth.

If the effort succeeds, it will free up power capacity and kick-start the building of roads and highways which, with their multiplier effect, will serve as a stimulus for an economy that has been hobbled by stalled investments, delays in regulatory approvals, fuel shortages and a slump in consumer sentiment.

The government’s aim is to revive stalled road and power projects. According to government estimates, while around 28,000 megawatts of thermal capacity in the country is stranded due to reasons such as the inability of state electricity boards to purchase power, 260 public-private partnership road projects worth 60,000 crore have been stalled due to various reasons.

In addition to the two ARCs, the government is also considering setting up a power sector fund to bail out stressed projects. Mint had reported on 23 June about plans to set up such a fund.

In the budget that was presented on Thursday by finance minister Arun Jaitley, the government spelled out its intent to take effective measures for the revival of stressed assets. It also signalled a powerful government push to infrastructure.

Bad debts in the banking system have been on the rise as the economic slowdown, which pushed growth down to sub-5% levels in each of the last two years, halted many infrastructure projects and crimped the ability of the developers to pay back loans.

As of end May, outstanding bank loans to the power sector were at 5 trillion, an increase of 13.5% from a year ago. Loans to the road sector were at 1.59 trillion as of May-end, an increase of 15.1% year-on-year, according to Reserve Bank of India (RBI) data.

While gross non-performing assets (NPAs) in the overall banking system are estimated at 3.9% of the loan book as of end March, NPAs for the infrastructure sector alone are estimated at 8.22%.

“The ARCs will have representation from banks as well as primary stakeholders, and are aimed at reviving stressed assets in these sectors, though the banks will only have a minor stake," said G.S. Sandhu, secretary, department of financial services, at a press briefing on Friday.

The ARC for the power sector is likely to have public sector units such as Power Finance Corp. Ltd and Rural Electrification Corp. Ltd and some banks as stakeholders, and will look to revive private sector power projects that they have invested in.

A similar ARC for the road sector has been proposed by the National Highways Authority of India for reviving stressed road projects, Sandhu said.

The existing ARCs are only in the business of buying and selling loans and do not have the capacity to revive stalled infrastructure projects, he said. “What we want is that the stalled projects are completed and handed back," he added.

The proposal to set up these ARCs raises doubts about the effectiveness of the corporate debt restructuring (CDR) mechanism, said Ananda Bhoumik, senior director at India Ratings and Research Pvt. Ltd.

“It is perhaps an acknowledgement that the bank restructuring mechanism is not working fully and needs to involve other non-bank stakeholders, who are more qualified to handle such projects as well," he said.

There were around 280 live cases under CDR involving an amount of 2.42 trillion as of March.

Under CDR, bankers typically extend the repayment period for stressed borrowers, cut lending rates and sometimes agree to forego a part of the money that’s owed to them. Banks may also offer a repayment holiday.

Sandhu also said that the bank consolidation process is likely to be kick-started by merging State Bank of India’s (SBI’s) subsidiaries with the parent bank. He, however, did not give a time frame for this.

The government will also start the process of divestment of stakes in state-run banks in the next few months.

“We have asked all banks to submit their capital requirement plans. They have given their proposal and we are giving final touch to them. The schedule will be worked out soon," Sandhu said.

The decision would be based on various considerations including the value of shares and possibility of the share price going up further, he added.

Jaitley, in his budget speech on Thursday, said the capital requirements of state-run banks to meet international norms are estimated at 2.4 trillion by 2018. To achieve this, the government will gradually, over the next few years, divest its stake in state-run banks to 51%.

Indicating that the issue will be mainly targeted at the retail segment, Jaitley said that “the citizens of India will also get direct shareholding in these banks, which currently they hold indirectly".

The process could be kicked off by SBI and Punjab National Bank this fiscal year.

The government will also push banks to list their insurance subsidiaries in the stock exchanges as a part of the government’s efforts to prod public sector banks to raise funds by hiving off their non-core assets.

Another option that is being considered is to allow state-run banks to leverage their real estate holdings to raise capital through a special purpose vehicle (SPV). The real estate assets of the banks will be transferred to this SPV, which will then raise money for the banks. Bank of India has approached RBI with such a proposal.

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