Finance Ministry Suggests Forming Panel To Tackle Stressed Power Assets
The Finance Ministry suggested setting up an empowered panel to tackle power sector stress, besides giving operating plants not facing insolvency action yet six months more months to resolve issues.
The high-level empowered committee should in a time-bound manner look into issues faced by the sector, especially independent power producers, according to a report prepared by the Department of Financial Services. It classified projects into four categories: resolved assets; admitted by/referred to the National Company Law Tribunal; under construction; and operational plants not yet referred to NCLT. The panel will examine resolving the issues of plants in the last category.
The report was prepared after a June 21 meeting, chaired by the Secretary of Department of Financial Services Rajiv Kumar and attended by officials of the Power Ministry, Reserve Bank of India and Ministry of Petroleum and Natural Gas. BloombergQuint has obtained a copy of the report.
It came after the Allahabad High Court’s June 1 order that no action be taken against power producers till they are heard. They generation companies had challenged the Reserve Bank of India’s Feb. 12 circular that laid down stricter timelines for initiating insolvency proceedings. It also mandated that banks classify even a one-day delay in debt servicing as default. For accounts with an exposure of Rs 2,000 crore or more, banks will have to ensure that a resolution plan is in place within 180 days after a ‘default’.
Private power producers feared that the RBI’s new regulations would push projects with a capacity of about 60,000-70,000 megawatts towards bankruptcy and sought more time. The central bank, according to submissions mentioned in the report, is not in favour of giving more time.
The Finance Ministry’s focus is on the fourth category of projects that have been commissioned as on Feb.12, 2018 and may have full or partial arrangements for fuel supply and sale of power.
“If sectoral concerns that are holding back such assets from realising their potential are addressed in a time-bound manner, then the viability of such plants and their ability to service debt due to banks could improve substantially,” the report said. “Therefore, these set of assets may need to be considered differently to avoid potential value erosion and unreasonable haircut for banks that may happen otherwise.”
For these commissioned assets, an additional 180 days beyond the period permitted by the Feb. 12 circular before they are referred to the NCLT could provide a window for optimising operations, it said. During the extended period, banks should carry out “more intensive monitoring of the account and its cash-flow to mitigate further possibilities of slippages”.
Views of stakeholders will be taken before submitting the government’s position to the high court on Aug. 2.
The report identified the four categories of assets and their lenders.
RBI Favours ARC
The central bank, in its written submissions, said “deep-seated problems” of the power sector aren’t temporary and don’t require only short-term moratorium from its norms.
The problems are likely to take long for resolution, and the financial sector, in the interim, cannot ignore the stress on its books, the RBI said. The bankers have indicated to the central bank that six months is adequate to restructure all stressed assets.
The mindset of the banks to act only after 90 days of a default, when there is a prolonged default in payments, is one of the contributors to the deteriorating banks’ asset quality, the central bank pointed out.
The RBI said that 34 identified stressed assets are either non-performing or under “great stress” since most of these have been restructured in the past under various other schemes. The Feb. 12 circular provides banks full freedom to devise restructuring schemes tailored to meet the specific needs of each case, it said.
“Whereas 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 said.
The RBI is open to setting up an asset reconstruction company for stressed power assets—a suggestion that was put forth by the Rural Electrification Corporation. “The proposal should be premised on a ‘level playing field’ agnostic of public/private ownership and based on transparent price discovery.”