According to recent news published on the Business Standard, the leading banks of India are designing a scheme for bailing out stressed assets in the power sector, which, as per the latest report of Parliamentary Standing Committee on Energy, are in the tune of Rs. 70,000 crores. According to the news article, there is a probable list of thirteen coal power projects which could be part of the scheme.
According to the news article:
With the Reserve Bank of India (RBI) declining any special dispensation for the power sector, leading banks are designing a scheme for bailing out stressed assets. The same might be followed during the proceedings under the National Company Law Tribunal (NCLT). The selected assets will be the ones that can meet the RBI’s 180-day deadline for completing resolution proceedings of stressed assets.
The power ministry had asked the RBI to provide a breather to the power sector in the Insolvency and Bankruptcy Code (IBC) guidelines. The RBI, in February, mandated banks to classify even a one-day delay in debt servicing as default.
It was further mentioned in the news article that the leading bankers had recently met to draft a proposal outside the IBC route to bail out the stressed power assets. The initial plan was to identify the component of sustainable debt in an asset. Then, rework on the debt-equity at an assumed cost. The banks have proposed that a separate agency can acquire a portion of the equity.
It is significant to note that this meeting of the leading bankers comes after RBI rejected the request from the Power Ministry to give a breather for the power industry. With the introduction of Insolvency and Bankruptcy Code (IBC), RBI has directed banks to start insolvency proceedings against failing industries. Given this context, the willingness of the key lenders to design a bail-out plan for power companies outside the IBC route assumes much significance. Even in the current proposal, banks buying the equity of the stressed companies in the power sector, or using a separate agency would be a flawed decision, as banks or the agency would lack the expertise to execute a power project successfully.
In March 2018, the Minister of Power R.K. Singh had told media that the State-owned firms NTPC, REC and PFC were planning to float a Special Purpose Vehicle (SPV) to operationalize stressed assets of 25,000 MW in the first tranche, where the SPV would take over the plant for a temporary period, till the time the lenders can extract a fair value from the stressed asset. Now the ministry has asked the RBI for relaxation to stressed power projects. This not only shows that power sector, especially coal power projects, are under severe threat, but also indicates that how the government is in a hurry to bail out the private sector companies. What is lacking is that the government still does not want to scrutinise the loopholes – like delicensing – in the power sector policies. By bringing in delicensing in power generation, through Electricity Act, 2003, the Government had removed the need for obtaining a license for setting up a power plant by the private companies, which resulted in unplanned capacity addition, which is one of the major reasons behind mounting stressed assets in power sector.
Banks resorting to designing a scheme for bailing out stressed assets outside the IBC route, within a year of the promulgation of IBC, only shows the lack of the faith of the banks in IBC/NCLT mechanism and this also brings us back to the question of faulty lending practices of the banks, which has led to accumulation of huge stressed assets in power sector. The banks are looking at two possible options to recover debt: firstly, by converting its debt into equity; and secondly, by bringing another promoter or run the project along with them till they recover the money. Neither of the options is viable as it is highly doubtful if banks would get the desired results. Converting debt into equity does not necessarily help in recovering the losses. Moreover, running companies is not the expertise of the banks and may not necessarily result in any profits.
The problem being faced by the banks is quite grave as stressed assets in power sector have continuously increased. India’s biggest bank, SBI, has 30% share in stressed assets in power sector. The Parliamentary Standing Committee on Energy has recognised the problem of NPAs and stressed assets in the power sector and came out with a report on this in March 2018. The Committee had even called for a meeting with all stakeholders to do a comprehensive assessment of the problem.
The Parliamentary Standing Committee on Energy found that out of the total outstanding debt of Rs.5.59 lakh crores in power sector, 18% (Rs. 98,799 crores) is stressed. The total gross NPA stands at Rs.37,941 crores in the power generation alone. The Committee has identified 34 power projects with the installed capacity of 40,000 MW, with a total outstanding debt of Rs.1.75 lakh crores facing serious stress. Out of these 34 power projects, 32 of the power projects belong to the private sector. The report also mentions that among power Generation, Transmission and Distribution, 91 percent of the stressed assets belongs to power generation. The Committee observed that the frantic push to bring private companies in thermal power sector through Electricity Act, 2003 as one of the major reasons behind a large number of stressed assets.
However, the banks are not stopping their investments in the coal power sector. The latest report of Bank Track on financing coal titled ‘Bank Vs Paris Agreement’ says that Indian banks have financed heavily in coal power sector. According to the report, between January 2014 and September 2017, 23 Indian banks lent around Rs.1,15,000 crores to 10 Indian companies operating the coal-based power projects. The State Bank of India alone invested around Rs. 56,830 crores in the coal companies in the same period.
Instead of trying to bail out the stressed power sector, the Government should look into loopholes in policies. The Government should assess the viability of the projects, along with comprehensively assessing the need of nation’s electricity requirement to ensure that the haphazard capacity addition by the private sector is reviewed from time to time. Before giving clearances to new power projects, the Power Purchase Agreements (PPA) and Letter of Assurance (LoA) of coal supply for the projects should be in place.
Likewise, the banks should stop further lending to the coal power sector. They must look critically at their lending practices and due diligence process. The lenders should recover the debt from the companies and their promoters, instead of resorting to recover money from common people in the name of the charges for withdrawing money or not keeping a minimum balance in the account.
The central Govt is favouring the private power companies for which the RBI is pressurized to change its stand and initiation to bale out the companies by the Nationalised banks is also a political move of the Modi Govt to get election fund through favouring these debted companies.
Firstly quoting from your article: “The banks are looking at two possible options to recover debt: firstly, by converting its debt into equity; and secondly, by bringing another promoter or run the project along with them till they recover the money. Neither of the options is viable as it is highly doubtful if banks would get the desired results. Converting debt into equity does not necessarily help in recovering the losses.” An alternative to the two possible options was to be expected. Anyways, thats an alternative we don’t like to spend time on. One needs to critically look at IBC to understand whats transpiring, and especially Section 29A of the IBC, where there is a need to differentiate between genuine distress and mismanagement, and this puzzle could be solved by taking recourse to rating agencies (sorry, for the time being, such devils are the only mechanism we have recourse to), who could devise a framework to differentiate between the two. Further, bidding norms for small and medium enterprises (and aren’t there small and medium power units in distress?) could be relaxed a bit as large number of cases are going towards liquidation for want of bidders. Differentiating financial investors from existing promoters, in order to ensure they don’t become ineligible in case of unsuccessful turnarounds could be a way out. I don’t think it is as simple as banks trying to bail out power sector in an effort to kickstart them afresh. What banks find difficult, and in that, it is a technical issue is ambiguity towards differentiated rights for priority funding. Clearer rights to priority funding can help contain NPAs. First, enabling access to timely funding would keep an asset from coming under IBC. Second, if an asset does come under NCLT, access to priority funding at reasonable rates can preserve asset values, and attract more bidders and help in faster resolution. Whats happening in power sector is precisely banks trying to learn this mechanism in a hurry and thus seemingly giving an impression that a bail-out is in process. But, this could be my reading alone. BTW, nicely written piece Rajesh and Nishank.