Power sector was among the hardest hit
Power sector was among the hardest hit

Banks risk adding $25 billion in power sector NPAs on Supreme Court decision

  • Supreme Court will today begin hearing arguments on whether RBI's one-day default norm applies across industries
  • It had in September halted proceedings against power, sugar and shipping companies after they challenged the RBI NPA norms

Mumbai: A year after the Reserve Bank of India (RBI) tightened the screws on companies delaying debt payments, the Supreme Court is poised to begin hearing arguments on whether the banking regulator’s diktat applies across industries.

Hanging in the balance is the fate of more than $25 billion of loans to power producers. They are among parties contesting RBI's 12 February circular that forced banks to recognize loans as non-performing assets (NPAs) if dues are delayed even by a day and to approach bankruptcy courts if a restructuring isn’t agreed to within 180 days.

The top court in September halted proceedings against power, sugar and shipping companies after they challenged RBI's one-day default norm.

The RBI circular last year, which scrapped previous methods for recasting bad loans, rattled companies and lenders alike. The power sector was among the hardest hit with the government identifying as stressed 34 plants with outstanding debt of about 1.8 trillion. If the RBI directive is upheld, many of these would immediately be pushed into insolvency court with lenders forced to dial-up provisions. The top court has said the case will be on top of its agenda for Wednesday and a judgment is expected once arguments conclude over the next few weeks.

The top court’s September halt on further action had offered lenders some breathing space to look for buyers for these businesses. Those scouting for acquirers for power assets though had little luck as the sector is plagued by fuel shortages and difficulties negotiating long-term supply contracts with the country’s debt-laden electricity distributors (power discoms).

Of the 34 plants identified as stressed, only a few units—including JP Power’s Prayagraj unit—are anywhere close to resolution, people familiar with the matter said. Banks could face a 75% loss ratio on their lending to these stressed companies which are on brink of bankruptcy, according to a Bank of America Merrill Lynch (BofA-ML) estimate.

Bloomberg's Upmanyu Trivedi contributed to this story.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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