​​​
  1. RBI right to not grant relief for power sector NPA

RBI right to not grant relief for power sector NPA

Like all other NPAs, they have to be fixed via the IBC process; if banks get hit badly, that’s the price of reckless lending.

By: | New Delhi | Published: June 25, 2018 5:26 AM
The Reserve Bank of India (RBI) has rightly put its foot down on giving lenders forbearance for stressed power-generating assets. (Reuters)

The Reserve Bank of India (RBI) has rightly put its foot down on giving lenders forbearance for stressed power-generating assets. While it is true this could lead to expensive assets being sold for a song, yielding relief to specific sectors is not just patently unfair, but also is fraught with danger since it could lead to prolonged and costly litigation. The real risk is that it would jeopardise the insolvency process under the Insolvency and Bankruptcy Code (IBC) that is still in its early days.

The fact is that lenders needed to have been far more circumspect while bankrolling these projects, and must pay a price for their recklessness. The central government too must accept its fair share of the blame; for decades, it allowed the discoms of state electricity boards (SEBs) to get away with not paying their dues on time, not bringing down AT&C losses and not raising tariffs adequately. Had it stopped the state-owned lenders from funding the huge losses of the SEBs—the Rajasthan SEB, at one point, had accumulated losses of Rs 80,000 crore—the SEBs would have been forced to become more efficient. However, today, they are strapped for cash and unable to sign power purchase agreements to buy electricity; some sign PPAs only to renege on them. The Centre also failed to provide the fuel linkages that it had promised, leaving some 20,000MW of power generating capacity stranded.

While the loss to banks will be colossal if the power assets are sold or liquidated, postponing the problem by allowing the banks to hold on to these loan exposures—approximately, Rs 2.5 lakh crore—is worse. SBI chairman Rajnish Kumar recently asked for an asset reconstruction company (ARC) that could take over the bad loans of banks. Kumar’s concerns are understandable, as are those of other lenders—they have already taken big hits for loan losses over the past two years and will need to take more if the power exposures go bad as they are likely to. However, a bad bank is a bad idea and would set the wrong precedent with bankers expecting a bailout each time they are in trouble. To be sure, the RBI circular of February 12, which had directed banks to classify as stressed any account on which a borrower had defaulted even for a day, might seem harsh. It is a fact that lenders are unlikely to be able to come up with a resolution plan (RP)—for aggregate exposures of Rs 2,000 crore or more—within 180 days of the default. They are also unlikely to be able to find buyers for these assets so, from the looks of it, most of these cases will find their way to the NCLT.

To many, it would appear RBI is being unduly strict, but that is necessary. It is precisely because the central bank was so lenient on asset classification in the past—before the asset quality review was initiated in Q3FY16—that banks were able to evergreen loans and sweep the dust under the carpet. RBI’s prudential guidelines on loans to business groups and individual companies, too, were far from prudent; its plea that business groups must be allowed generous limits so as to help build industry has only resulted in huge losses for the banks. The real loser in all this is, of course, the hapless taxpayer.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Go to Top