RBI backs plan to have an ARC take over stressed power assets

Our Bureau New Delhi | Updated on July 27, 2018 Published on July 27, 2018

But opposes relaxing liquidation timelines for the sector

The Reserve Bank of India has seconded the Rural Electrification Corporation’s proposal to form an Asset Reconstruction Company (ARC) to take over stressed assets in the power sector.

The RBI, in its representations to a committee headed by the Secretary, Department of Financial Services, said that it is open to considering the suggestion by the REC that there could be a special ARC to take over banks’ stressed power assets.

“The proposal should be premised on a ‘level playing field’ agnostic of public/private ownership, and based on transparent price discovery,” the RBI said.

The committee has been tasked by the Allahabad High Court to find a resolution to power sector assets facing liquidation due to the RBI circular of February 12.

On the power sector’s request for a relaxation from the circular that mandates initiation of liquidation proceedings for a debt servicing default beyond 180 days, the RBI stood firm. “If RBI makes exceptions for any sector, there is likely to be a host of demands for exceptions, from other categories of stressed borrowers. These may even include legal challenges, as in the instant case,” it said. The RBI agreed that the problems in the power sector will spill over to the financial services sector and, therefore, need to be addressed immediately. “As has been amply demonstrated in the presentations made in the meeting, the problems are likely to take long to resolve and the financial sector cannot ignore the stress on its books, in the interim,” the RBI added.

The central bank noted that the February 12 circular further ensures that banks recognise stressed assets so that they may initiate a specific resolution for each case. It said that the circular has not withdrawn any restructuring options, as suggested by some. On the contrary, it has provided banks full freedom to devise restructuring schemes tailored to meet the specific needs of each case, without the adverse incentive for shoehorning every restructuring into the models provided by the regulator, for classification or provisioning benefits.

“Differentiated methodologies can be adopted by banks in crafting financial restructuring, with regard to specifics of each sector, banks’ recognition of financial stress on their books, and provisioning for this stress, needs to be sector-agnostic,” the RBI added.

DFS bats for relaxed norms

But, the Department of Financial Services has decided not to endorse the RBI’s suggestions. It has cited the key recommendations of the 37th report of the Parliamentary Standing Committee on Energy. The DFS has recommended that a high-level empowered committee look into the problems of Independent Power Producers with a view to bring them out of the non-performing asset or stressed asset quagmire.

This empowered committee will be tasked to deal with the cross sector concerns raised by various stakeholders and consider suggestions made by them. It will be constituted by the Ministry of Power. This would be in line with the recommendation given by the Parliamentary Standing Committee on Energy in its 37th report, the DFS led committee noted.

The DFS committee also suggested that an additional 180 days, beyond the timelines prescribed under the RBI’s circular dated February 12, 2018, be allowed to thermal power projects that have been commissioned and that have not been admitted or referred to the NCLT so far.

Published on July 27, 2018
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