Plan A was to get government power and power finance firms, like NTPC Ltd., Power Finance Corporation Ltd. and Rural Electrification Corp., to rescue stressed power projects.
Two serious attempts and one year later, that plan has been abandoned.
Now comes Plan B. Where banks come together to form an asset management company of sorts, which takes over stressed power assets and brings in an entity like NTPC to operate them till they are healthier.
At risk are nearly Rs 1.8 lakh crore in loans held by stressed power projects. Bankers fear that unless some collective resolution plan is worked out, the recovery on these loans would be low. Already laden with bad loans and provisioning requirements, banks are fearful of taking yet another hit. And so, a new plan is in the works.
According to three bankers familiar with the matter, State Bank of India is in the final stages of drafting the resolution plan, which will be presented to the government. Ajay Kumar Bhalla, secretary at the Ministry of Power, in an interview to BloombergQuint, confirmed that bankers will soon present a new resolution plan to the government.
SBI had a meeting of all lenders in Mumbai. They are working on what could be the level of sustainable debt, what could be the rating of this, and then what are the other regulatory issues which the Ministry of Power can resolve once the resolution plan is there.Ajay Kumar Bhalla, Power Secretary
What Is The Plan?
As part of the plan, lenders will float an AMC which will have equity contribution from banks, alternative investment funds, the National Investment and Infrastructure Fund, pension funds and other long-term investors.
The banks would convert unsustainable debt held by the stressed power projects into equity. This equity would then be transferred to the AMC at a pre-decided price. The AMC will look to purchase equity from promoters of these stressed companies to gain majority control.
According to the lenders quoted above, the AMC would continue to hold majority equity for a period which may extend up to five years. It will also employ a state-owned power company like NTPC Ltd as an operational agent, to manage the company.
Simultaneously, the AMC will negotiate with potential buyers to sell these assets and recover dues.
Why The Panic?
While banks have been concerned about stressed power assets for some time, the issue has become more urgent after the RBI released a new stressed asset framework on Feb. 12.
The new framework withdrew all existing stressed asset management schemes such as strategic debt restructuring (SDR), scheme for sustainable structuring of stressed assets and 5/25 long-term refinancing. From here on, banks cannot use these schemes to restructure accounts without classifying them as non-performing assets.
The new guidelines ask banks to resolve stressed assets within 180 days of the first default, failing which, the account must be sent to the National Company Law Tribunal for insolvency proceedings.
Lenders fear that in the absence of ready buyers, most stressed power assets would get referred for insolvency proceedings and lead to large haircuts. This at a time when banks already have Rs 8.8 lakh crore in bad loans.
Easier Said Than Done
To move ahead with the plan, banks need to sign binding agreements with all stakeholders. They also need to get assurances from individual state governments that distribution companies will not cancel their power purchase agreements if the ownership of the power generation companies changes.
On its part, the central government has indicated its support for such a plan, Bhalla told BloombergQuint.
Banks were also hoping that the RBI will give them some special forbearance for power sector accounts. According to the Power Secretary, the RBI’s view is not favorable as the regulator stays away from sector specific dispensations.
We have said that the sectoral issues may be seen differently. To this, the RBI has said, as a bank regulator, they don’t look at sectoral issues. It is for the Ministry of Power to look at those issues.Ajay Kumar Bhalla, Power Secretary
Banks should have seen this coming, Anil Razdan, former power secretary told BloombergQuint. Lending institutions have not been vigilant enough in managing the risk involved with these power assets, he said. Razdan added that banks could have sought board representation and kept a closer eye on operations since large amounts of money had been loaned to the projects.
Can the plan being mulled by lending institutions work?
“Details of the plan are still emerging, but for a running power plant, you would need to have some form of deep commitment and medium term involvement to protect the value of the asset,” Razdan said. He also pointed to the experience of the Dabhol power plant, where NTPC and GAIL had taken over the asset to help turn it around, but had little success.