In a bid to resolve mounting non-performing assets [NPAs] of public sector banks [PSBs] in a time bound manner, on February 12, 2018, the Reserve Bank of India [RBI] had issued an order requiring banks to initiate resolution of stressed assets – the so called special mention account [SMA-2] wherein either the loan or interest is in default for 60-90 days.
As per the above circular, as soon as there is a default in the borrower’s account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default. The resolution plan [RP] may involve any actions/reorganization including, but not limited to, regularization of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities/investors, change in ownership, or restructuring.
In respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above as on March 1, 2018, RP should be implemented within 180 days. If, it is not done by the D-day or August 27, 2018 thereafter, the case will be referred to National Company Law Tribunal [NCLT] under Insolvency and Bankruptcy Code [IBC]. The proceedings under NCLT must be consummated within 180 days with an extension of 90 days in exceptional cases.
In the power sector, 34 coal-fueled power projects with total capacity of around 40,000 MW and exposure of Rs 177,000 crore to banks and financial institutions [FIs] are under stress. Even as August 27, 2018 is approaching fast, the lenders have approached the RBI and government seeking extension of the deadline as they are keen to avoid the cases being referred to NCLT. Meanwhile, the Independent Power Producers Association [IPPA] has also filed a petition in the Allahabad High Court [AHC] seeking relief from the impugned order.
The centre is inclined to grant relief justifying its stance on the ground that the power projects have come under stress due to circumstances beyond their control. The key factors include delay in commissioning, inability to sign power purchase agreements [PPAs], lack/absence of fuel linkage and lingering payment dues from the power distribution companies [PDCs]/state electricity boards [SEBs].
While, some of these factors [call them ‘exogenous’] may have compounded the woes of the defaulting companies/borrowers, the role of factors internal to the management cannot be ruled out. In this regard, early this year, there were reports of the ‘government nudging bankers to take criminal action against independent power producers [IPPs] that have inflated project costs’.
The diktat was a follow-up to the new power minister RK Singh last year hinting at government’s intent to investigate ‘whether private developers gold-plated project costs’. He had suspicion that IPPs inflated project costs to raise a higher amount of debt to cover their equity component—a practice euphemistically described as ‘gold-plating’ in common parlance.
For instance, if, a project’s actual cost is Rs 100 crore with a debt to equity ratio of 2:1, the promoter declares it as Rs 150 crore. This way, he manages to fund it entirely with debt of Rs 100 crore without having to contribute even a penny toward equity.
With no capital of their own and facing no risk, such promoters recklessly went on a borrowing spree from banks/FIs. The latter readily gave loans – without conducting due diligence and assessing viability of projects – as they were taking tacit orders from corrupt politicians and bureaucrats on behalf of the former. In such a scenario, it was only natural that the loans would come under stress.
Having been given so much time already to set things right, it makes no sense to allow such promoters more leeway. They need to be referred to the NCLT for initiating action under IBC. Even so, it is unethical for the government to talk of criminal action [for ‘gold plating’] on the one hand, and bail them out on the other.
The union government might be keen to give more time to let creditors come up a RP, but the RBI has refused to budge. It has argued that the powers given to it under the amendment to the Banking Regulation Act [BRA] [2017] can only be applied uniformly to all cases and that any attempt to carve out a special dispensation to a given set of borrowers [albeit in the power sector] would tantamount to discrimination and would be constitutionally invalid.
The centre needs to listen as the RBI is only acting in sync with spirit of the amendment in BRA. It should let resolution of power assets happen under IBC. Any apprehension that this will be detrimental to banks interest is absolutely baseless. As amply demonstrated in a number of cases referred to NCLT [e.g. Bhushan Steel, Bhushan Power and Steel, Essar Steel, Reliance Communications Limited], the banks will realize maximum value by letting the stressed power assets go under the hammer.
To the extent, there are projects genuinely affected by factors beyond promoters’ control such as fuel linkage, PPA, payments by PDCs/SEBs etc, nothing prevents the government from giving necessary support. There is no contradiction between implementing these measures and letting resolution happen under IBC.
Meanwhile, a committee under Sunil Mehta, chairman, Punjab National Bank [PNB] has come up with a plan dubbed ‘Project Sashakt’ that involves inter alia setting up of an asset management company [AMC] to resolve loans above Rs 500 crore. Through inter-creditor agreement, the banks will authorize the lead bank to invite bids through open auction in which the AMC can also bid for along with others such as asset reconstruction companies [ARCs].
This is resurrecting the idea of a ‘bad bank’ under a new garb. This will entail transfer of NPAs from banks books at huge discount to AMC. Further, letting promoter of defaulting company retain a share [24%] even after AMC takes full control smacks of enabling him to slip in to the drivers’ seat after the asset is repaired.
It is a devious attempt to bail out the promoter at the cost of banks. The government should refrain from taking this on board. Instead, it should let resolution under IBC work unhindered in a ‘fair’ and ‘transparent’ manner.