Lenders to power assets said that Friday’s Allahabad High 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 Reserve Bank of India’s (RBI) February 12 circular. The circular, withdrawing earlier restructuring guidelines, have resulted in a large number of loans where the recast was not implemented to turn bad. Reacting to Allahabad High Court’s judgement on Friday staying action against power sector companies under RBI’s one-day default circular, a senior public sector banker said that lenders have classified a large chunk of power sector loans as NPA following withdrawal of restructuring schemes.
“The ensuing provisions could be reversed in Q1 of 2018-19 if the February 12 circular is rescinded,” he said. For instance, State Bank of India (SBI) saw power sector slippages (incremental NPAs) of Rs 11,071 crore in Q4 of 2017-18. That apart, the bank also has Rs 10,575 crore power sector loans in its watchlist of stressed loans. The total size of SBI’s watchlist is Rs 25,802 crore and its gross NPA in the power sector is 19% of the total loans to the sector.
According to RBI data, the total loans by banks to the power sector stood at Rs 5.18 lakh crore as on April 27, 2018. In February, RBI had asked banks, either singly or jointly, to initiate a resolution plan as soon as a corporate default is spotted. In other words, banks have several options to revive the defaulting companies but these must be exercised within 180 days.
Going by the new framework for resolution of stressed accounts, the fate of a defaulting entity will be sealed within 465 days. Through its February 12 circular, the central bank had abolished all existing restructuring schemes like strategic debt restructuring (SDR), scheme for sustainable structuring of stressed assets (S4A) and 5/25.
If lenders are not able to work out a solution to revive a company within 180 days, the account must be referred to the National Company Law Tribunal (NCLT) and the case would be decided under the Insolvency and Bankruptcy Code (IBC).
Meanwhile, losses posted by state-owned lenders in the three months to March have crossed a staggering Rs 60,000 crore, with just two banks having turned in a profit so far. The losses of public sector banks (PSBs) in Q4FY18 have stemmed largely from slippages, or exposures that turned bad during the quarter.
Many of these exposures related to accounts for which lenders had initiated a strategic debt restructuring (SDR) but had failed to implement. For instance, Bank of India (BoI) had identified 45 accounts for SDR, of which 39 accounts were. Of the approved cases, SDR could be partially implemented in four companies where the bank has an exposure of Rs 932 crore.
Some banks have chosen other routes to get rid of stressed power loans. Axis Bank recently put on sale a 600-megawatt (MW) thermal power plant in Madhya Pradesh set up by the Avantha Group-owned Jhabua Power. The plant had availed loans worth Rs 3,018 crore from a consortium led by the private lender in December 2009. Axis Bank’s exposure stood at Rs 325 crore.
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. Meanwhile, banks are working on a plan to resolve Rs 70,000 crore worth of non-performing assets (NPAs) in the power sector through operation and maintenance (O&M) contracts. The mode of resolution for power assets will involve determining the “sustainable debt” levels of completed plants with existing power purchase agreements (PPAs) and coal supply arrangements.
