Arguably, the Insolvency and Bankruptcy Code (IBC) may turn out to be the most important piece of reform in India in the last 15-20 years. The results, so far, have been encouraging. Already, about Rs 90,000 crore (i.e. about 9% of the total NPA base) worth of bank NPAs (non-performing assets) have been resolved under this regulation. Further, Rs 2 lakh crore worth of NPAs are in the IBC pipeline, and should be resolved over the next 4-6 quarters.
However, a strange twist has recently emerged on the periphery of the IBC. Many stressed assets are on the verge of getting referred to the National Company Law Tribunal (NCLT), as per IBC, for initiation of bankruptcy proceedings after August 27. This is based on the Reserve Bank of India’s circular dated February 12, 2018, to initiate a time-bound process of loan resolution. It stipulates that a non-restructured loan has to be automatically moved into the IBC process after the passage of 180 days, post a default. The power industry and its lenders were lobbying with the RBI to seek waiver for power sector borrowers from this new framework. The Allahabad High Court, on Monday, refused to give any interim relief.
Currently, more than 35 power projects—and most of which are in the private sector—are stressed. With a combined capacity of 40 gigawatt (GW)—which amounts to 18% of India’s thermal power capacity—they owe a humongous about Rs 2 lakh crore to the banks. Most of these accounts will not just slip into the NPA list, but will also be referred to the NCLT if the RBI’s new framework is enforced.
The stress for most of these plants is reflected in their abysmal plant load factor (PLF). At an average PLF of 54% in July 2018, the private sector power plants are quite far from stability, either operationally or financially. In fact, in many of these instances, low PLF is rooted in the lack of power purchase agreements (PPAs) and/or coal constraints.
It is not difficult to see that many underutilised power plants will start looking in a much better shape starting 6-8 quarters from now. First, India’s power demand can grow at a rate of 6-7% per annum over the next 2-3 years. Then, as the power distribution companies’ balance sheets and profitability improve—aided by the government’s UDAY (Ujwal DISCOM Assurance Yojana) scheme—they are likely to float many more PPAs. Finally, Coal India Limited should be able to enhance its coal supply by a sizeable 85-90 million tonne per annum, over the next two years.
Accordingly, banks and power producers may have a case when they are demanding soft glove treatment for the power industry. If these power plants are referred to the NCLT in their current state, the bids that they receive in the subsequent auction may be awfully low. On the other hand, if they are warehoused as per the Project Sashakt—as has been recommended by the high-powered committee of bankers in July—for 2-3 years, they may not necessitate more than 40-50% haircut for the banks. The latter may not be a bad outcome for the lenders.
Not surprisingly, the government of India—being the main equity holder of the public sector undertaking (PSU) banks—also appears to be warming up to the idea of waiver for the power sector from the RBI’s new framework. This can help buy time to iron out the details of the Project Sashakt. As a promoter, the government cannot be faulted for trying to protect its financial interests by maximising PSU banks’ loan recovery.
On the other hand, and more importantly, as a policy-maker, the government’s job is to provide a conducive environment to the RBI in cleaning up banks’ NPA mess. In this role, the government may not impose artificial curbs on the authority of the RBI or the IBC. As a regulator, it must resist the temptation to create a special dispensation for power assets to promote its own cause.
If the proverbial Pandora’s box is thrown open, then nothing prevents other industries from lobbying for special treatments. This can puncture the entire IBC structure, which is still in its infancy.
One way to obviate the avoidable haircuts on the power sector loans—and without disturbing the RBI’s new framework—can be to create a special fund to bid for each such loan account. Such a special fund can have a contribution from the affected banks in the ratio of their exposure to that particular loan, the government, and also the Life Insurance Corporation of India (LIC). At the same time, the defaulting assets should not be prevented from slipping into the IBC if the norms demand so.
These special funds can effectively provide the reserve bids in the NCLT auction at, say, 50% of the outstanding loan amount for the respective power assets. If other bids are lower, then the asset is warehoused after this particular fund gets its control. The banks settle for this 50% haircut, but also become eligible for any gains that accrue to the fund after 2-3 years, as the plant’s finances and operations improve in the future, facilitating its resale. On the other hand, if some other bid is higher than this 50% bid, then the banks obviously get a better recovery rate and the special fund is not required to come into action.
The government’s share in the corpus of these funds—of a total of about Rs 1 lakh crore—need not be more than Rs 25,000 crore, with the rest coming from the banks themselves and the LIC.
Understandably, this may not be an easy decision. However, given that it is the government that has the highest stake in the banks, as well as in the overall success of the IBC process, it may have to bite the bullet. The government (the policy-maker) must overrule the government (the promoter of PSU banks).