Since the time the government has been toying with the idea of setting up ARCs (asset reconstruction companies) for stressed assets, this paper has wondered how these are going to be capitalised.
Since the time the government has been toying with the idea of setting up ARCs (asset reconstruction companies) for stressed assets, this paper has wondered how these are going to be capitalised. If a lender is already poorly capitalised and saddled with NPAS, how would it spare the capital to contribute to a fund of this nature? The fact is that very few state-owned banks today are well-capitalised, even after the infusions by the government. Now, it turns out that the REC-sponsored ARC cannot even pay the 15% upfront amount that the rules require it to. REC had requested RBI to waive the mandatory payment, but the central bank has—rightly so—denied it any special benefits. The ARC has been planned under the Parivartan framework for finding solutions to stressed loan exposures in the power sector.
In fact, the central bank was justified in turning down the government’s request for a special 180-day window for identified stressed power assets. The short point is that no sector or structure is special, they must all work within the prescribed guidelines. Making exceptions for one or the other only creates a moral hazard; companies are, in any case, rushing to the courts for relief, delaying the resolution process. In this context, the Allahabad High Court did the right thing by rejecting a plea to stay RBI’s February 12 circular that mandates that even a one-day default in servicing any account of `2,000 crore or more would warrant a resolution plan within three months, failing which, insolvency proceedings must be initiated. These rules may seem harsh, but given how lenders have been way too lenient with borrowers in the past, it is important that lenders are made to stay disciplined. While it is true that the power assets may not fetch banks a great price in the insolvency courts, it is hard to believe that an ARC will be able to sell these at a better price. After all, the gencos are in trouble because they either don’t have fuel linkages or power purchase agreements (PPAs); neither of these looks like it is going to materialise soon. REC may claim that it is a sector expert, but how does it plan to revive the units without fuel or PPAs? There is little point in tweaking the structure, which is what the government has reportedly asked REC to do. The best way forward is to hand over a couple of the power plants to NTPC and auction the rest. Once the debt burden is lowered, the tariff can be lowered and, thus, more PPAs may become possible. The government must work on convincing discoms to sign PPAs.