Allahabad HC asks finmin to hold meeting of other ministries, RBI, IBBI in June to find a solution
The Allahabad High Court has given a reprieve to a clutch of power projects under severe financial stress and facing the threat of being pushed into insolvency proceedings by ordering that no action be taken in their cases under the Reserve Bank of India’s (RBI) February 12 circular mandating early detection and resolution of stressed assets till the finance ministry called a meeting of relevant stakeholders in June to see if the issues could be resolved. The court’s ruling on Thursday, though applicable to only the petitioners under the banner of Independent Power Producers’ Association of India, would be welcomed by banks who have been unhappy over the circular curtailing their freedom in dealing with stressed assets in various sectors.
While the HC hasn’t set aside the RBI’s circular — it hasn’t even stayed it — its directive could spur demand for similar relief from stressed companies in other sectors, especially steel, and could even lead to an unravelling of the strict regime put in place by the central bank, analysts warned. The court asked the finance secretary to hold the meeting with his counterparts in the power, petroleum and coal ministries as well as the representatives of the RBI and the Insolvency and Bankruptcy Board of India.
The finance ministry, which had earlier written to the RBI seeking a relaxation of the circular, is likely to seize the opportunity provided by the court’s order to press the case. “We will soon convene the meeting, given the urgency of the matter, and take the power ministry on board as well for a comprehensive appreciation of the issues plaguing the sector,” a senior government official told FE.
The power ministry has been vocal against the RBI circular’s “impracticality” and a parliamentary panel too had concurred with it, saying, many power plants were “currently under SMA-1/2 stage or on the brink of becoming NPAs (non-performing assets)” due to “unforeseen circumstances” that hit their cash flows, credit rating, etc.
The RBI’s circular requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days (irrespective of sectors), failing which insolvency proceedings will have to be invoked against the defaulter. Ruling to have little impact on asset quality: Lenders, P12 Since the deadline for the resolution of the first set of such cases is end-August, power producers have been seeking urgent relief.
Some lenders to power assets, however, told FE the court ruling will have little impact on their asset quality as they have already classified a majority of their power sector loans as non-performing following the central bank circular. NPAs in the power generation sector have more than doubled to around Rs 70,000 crore from Rs 34,244 crore a year ago. About 10,000 MW power generation assets with debts of over Rs 34,600 crore are now before National Company Law Tribunal, constituting 18% of the sector’s exposure to lenders.
Out of these assets, 8,800 MW (debt of Rs 24,000 crore) are in early stages of construction with major milestones yet to be achieved. Some large power generation projects in the NCLT belong to companies such as Lanco, Monnet Power, East Coast Energy and Essar Power. Sources had said the finance ministry was of the opinion that lenders be given a year to finalise the resolution plan, instead of just six months, especially for the infrastructure sector.
The power producers had approached the HC for relief, arguing that the stress in the sector is often caused by factors beyond their control. Both the power ministry and producers had also petitioned the RBI for relief, but the central bank is learnt to have declined to offer any sector-specific relief. Even the banks, under the aegis of the Indian Banks’ Association, have written to the RBI for the relief.
What also makes the power players worried is the stipulation that where a loan is restructured as part of the resolution plan, the account should not be in default at any point of time until 20% of the dues are settled, else insolvency application will have to be filed by lenders within 15 days. Since loans to the power sector are usually long-term in nature, it takes three to five years to clear a fifth of the loan amount; so one default during this period can be costly. The circular also stipulates a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day.
The central bank last month justified its move on default rule, saying it is aimed at stoking behavioural change at banks.
Total loans by banks to the power sector stood at Rs 5.18 lakh crore as on April 27, 2018. Power sector loans of as much as $38 billion (around Rs 2.5 lakh crore) have the potential of being written off as bad loans, Bank of America-Merrill Lynch said in a report in April. The overall gross NPAs of all banks touched Rs 8.41 lakh crore by December 2017.
The HC on Friday cited a portion of the parliamentary panel report, which had recognised that stress in the power sector is often caused by factors — including fuel shortage, sub-optimal loading, untied capacities, absence of fuel supply agreements and lack of power purchase agreements — beyond the control of these companies. “Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery,” the panel had said in the report.
Some banks have chosen other routes to get rid of stressed power loans. Axis Bank recently put on sale a 600 MW thermal power plant in Madhya Pradesh set up by the Avantha Group-owned Jhabua Power. Last month, Union Bank had told analysts that it may see slippages worth Rs 5,000-6,000 crore in the power sector in FY19.