People walk past a light bulb in Bihar, India (Photographer: Prashanth Vishwanathan/Bloomberg)

Is It ‘Lights Out’ For The Government’s Plan To Resolve Stressed Power Assets?

The government continues to struggle to stitch together a resolution plan for stressed assets in the power sector. A second attempt to get government entities like NTPC Ltd, Power Finance Corporation Ltd (PFC) and Rural Electrification Corp. (REC) to come together and acquire stressed power projects has failed to gather much traction, said three bankers familiar with the matter.

At risk is nearly Rs 3 lakh crore in loans which could go bad over the next two years if a resolution plan is not arrived at, said the bankers. As per Reserve Bank of India (RBI) data, the banking industry had loans worth Rs 5.17 lakh crore against the power sector as of February 2018.

A plan to get government entities involved in resolving power sector stress had first been floated under former power minister Piyush Goyal. The power ministry, however, changed hands and the plan was put on the back burner. Discussions were restarted recently. On March 19, newspaper Business Standard reported that NTPC, PFC and REC may form a joint venture to bid for stressed power assets.

As per the plan, banks would take control of stressed power projects by converting debt into equity, said two of the bankers quoted above. They would then sell these power assets to the consortium of government power companies. The government consortium would pool these stressed power assets and manage them till they had fully turned around, the bankers said.

According to bankers quoted above, NTPC was not keen on taking the lead in pooling these assets, which has proved to be one key hurdle. Also, lenders with exposures to these power assets were not keen on taking the large haircuts that were likely under the plan.

Emails sent to the power ministry and NTPC seeking clarity on the matter went unanswered.

In a report dated April 10, rating agency ICRA pointed out that the visibility over resolution of nearly 60 Gigawatt in “vulnerable” thermal power capacity remains weak. This is partly due to “lack of long term PPAs, unviable tariffs amidst rising fuel costs, escalation in capital costs and uncertainty on domestic gas availability,” the rating agency said. It added that haircuts on these projects could range between 20-70 percent.

Others share the concern about financial health of firms operating in the power sector. Credit Suisse in a report in February had noted that the share of power debt with companies that have an interest coverage ratio of 1 stands at 57 percent. An interest coverage ratio of less than 1 suggests that a company is not generating enough revenue to make good on its interest expenses.

Is It ‘Lights Out’ For The Government’s Plan To Resolve Stressed Power Assets?

Listed Indian banks had bad loans of Rs 8.8 lakh crore as of December 2017, shows data compiled by BloombergQuint. This number is likely to rise further to about Rs 9.25-9.5 lakh crore as of March 2018. Most banks are yet to report earnings for the January-March quarter.

While resolution has begun in the case of large assets in the steel sector, recognition and resolution of stressed assets in the power sector has lagged behind, said Credit Suisse in its report.

The share of power and telecom loans recognised as non performing remains low, despite the increased slippages during the current (January-March) quarter. 
Credit Suisse Corporate Health Tracker (February 2018)

As such, an inability to find a resolution plan for the stressed power assets would mean an addition to the overall quantum of bad loans in the banking system.