Despite having deliberated the matter for some time now, after the Allahabad High Court asked to meet with stakeholders—the government has not been able to come up with a solution for stressed assets in the power sector. On Wednesday, the government said it would come up with a report in a couple of weeks while the court said it would hear the case again. To be sure, the problem is a challenging one since there are virtually no takers for these power plants which are stranded for want of fuel and power purchasing agreements (PPAs). For its part, RBI has very rightly denied banks any forbearance on provisioning and asset classification for the stressed power-generating assets.
As this paper has argued in the past, there is no justification whatsoever for sector-specific relief though there is no doubt that classifying these loan exposures—estimated at Rs 2.5 lakh crore—as non-performing assets (NPAs) would lead to these being sold off at huge discounts. Unless buyers come forth between now and end-August, these power plants would need to be referred to the National Company Law Tribunal (NCLT) and insolvency proceedings initiated. That is a pity because, going by the cases in the tribunals, the banks are taking fairly steep haircuts; Adhunik Metals has been won by Liberty House at a 92% haircut.
For the power assets, the haircuts could be in the range of 40-50% which means loans worth `1.25 lakh crore, or thereabouts, will need to be written off. The government could try and ask NTPC to take over at least one plant—either via the Insolvency and Bankruptcy Code (IBC) process—or even outside of it. Perhaps NTPC can repay the debt in a staggered manner, so that banks lose less. But the government must desist from asking RBI to provide lenient provisioning terms for power assets; after all, it is largely to blame for the mess in the power sector.
Had the fuel linkages been in place as promised, and had the Centre not pampered the state discoms, allowing them to run up losses and default on their loan obligations, much of the damage could have been avoided. Had the discoms been in better shape financially, they would not be reneging on the PPAs. Banks’ books must, at all times, reflect the true quality of their exposures and it is to be hoped the Allahabad High Court will continue to hold this opinion and not stay RBI’s circular of February 12 which directed banks to classify accounts as in default, even if the payments were late by a day. On Wednesday, it had refused to stay the circular. This is important because the central bank is trying to usher in some much-overdue discipline.