Hanging tough

In denying interim relief to power companies from the RBI’s diktat on stressed assets, the Allahabad High Court, has rightly cited rising NPAs, state of the banking sector, declining profitability of PSU banks, and the experience of the RBI in earlier restructuring schemes, among others, as compelling reasons. The last is of utmost relevance. The RBI’s February circular for stressed assets essentially did away with all the old restructuring schemes, and mandated banks to draw up resolution plans within 180 days, failing which banks will have to refer the cases for insolvency under IBC. Rather than granting relief from this directive to troubled power firms, the High Court has upheld the sanctity of the RBI’s move. After all restructuring schemes such as SDR and S4A turned out to be ticking bombs; large slippages from these accounts had pushed the RBI to junk all the schemes. But while acknowledging the circumstances that led to the RBI’s stringent move and underpinning its position as an independent regulator, the Court has also reminded the Centre that it can, if it wishes, bail out power companies on its own. While chiding the Centre for its ‘ambivalent’ position thus far in the matter, the court has prevailed upon it to begin a consultative process under Section 7 of RBI Act, that allows the Centre to give directions to the RBI in the public interest, after consultation with the Governor. Given that there has been no instance so far of the government exercising its reserve powers to issue a directive, it would be sensible on the Centre’s part to refrain from doing so now.

However, the fact remains that with the High Court ruling, the fate of the 34 identified stressed power projects by the Standing Committee on Energy — with an outstanding debt of ₹1.74 lakh-crore — is now in limbo. The niggling worry for banks that are saddled with large stressed power sector accounts is that a chunk of these stressed assets will now take the insolvency route. Structural issues plaguing the power sector — ranging from non-availability of fuel, projects set up without linkage, lack of PPA, tariff related disputes — will make it difficult to find buyers under IBC, leading to liquidation and erosion of India’s power generation capacity. The High Level Committee headed by the Cabinet Secretary formed to address issues within the sector, which has been directed by the High Court to submit its report within two months, has its task cut out.

Meanwhile, as stressed power projects totter through the IBC process, it is important that banks make adequate provisioning to deal with the mess; flip-flopping on this front will only weaken confidence in the banking system. After all, even if these accounts are quarantined into a national ‘bad bank’— an idea that is once again finding favour in many quarters — banks may have to take huge haircuts on transfer of such assets to the new entity, if the pricing is realistic and is done transparently.

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