Recently Reserve Bank of India vide its Feb 12 circular has revised the resolution framework for stressed assets wherein they had done away with JLF, SDR and other restructuring schemes. Now, as the framework stands its mandatory for lenders to send the cases to NCLT for resolution on the 181st day i.e. the very next day post the 180-day deadline. Definitely, this is a welcome move but at the same time this has sent the bankers in a hurdle for one sector wherein their exposures are huge. The sector I am referring to is Power Sector. The second list to be referred to NCLT is due on 01 September 2018. (The Hon’ble High Court of Allahabad has stayed the RBI Notification of Feb 12 on a petition of Independent Power Producers and the said petition also has been challenged in Hon’ble Supreme Court by related parties and the matter is coming up for hearing on 07th August 2018).
To understand the gravity of the situation the first authentic document which had brought out the enormity of stress is the report presented to Lok Sabha by the “Standing Committee on Energy, Ministry of Power, 16th Lok Sabha on 07th March 2018”. The report is very elaborate and has submissions of RBI, SBI, Power Finance Corporation, Ministry of Coal, Ministry of Finance. The report lists out thirty-four (34) stressed power plants and reasons listed for the stressed assets in this sector is unique unlike other infra sectors. The major causes of stress for such plants is non-availability of fuel (coal block cancellation, project set up without linkage), lack of enough power purchase agreement by states, contractual/tariff related disputes, aggressive bidding by Independent Power Producers (IPP) among others. (Source: pages 15-25, 38-46, 61-77, Standing Committee on Energy, Ministry of Power, 16th Lok Sabha on 07th March 2018)
The Power Purchase Agreement (PPA) as observed by the committee is a dominant cause. The reason for the same is how PPA is executed. State Distributors (Discoms) won’t enter into PPA unless the project is atleast 80 % complete and that too it’s a notional agreement as one condition of PPA to come into force is fuel supply agreement i.e. coal supply. So, based on this notional PPA or Letter of Intent (LOI) , IPP’s would go for Fuel Supply Agreement with coal producers such as Coal India Limited and finally before 6-8 months prior to commencement of production PPA agreement would be entered. After the Hon’ble Supreme Court cancelled the coal block allocation and later the Government introduced auction method. Many would not know even in auctions NTPC and other Govt. Owned Thermal Power Plants during that phase was accorded priority in allocation as there was imminent risk of power shortage in country at that time. This led to competitive bidding by the private players which created a cascading effect. Input Cost increased as to meet shortfall coal is imported from Indonesia, China and further complicated by tariff agreements as Discoms would enter PPA at a price agreeable to them which is lower than input cost for these IPP’s. Further, payments from Discom’s are delayed at most times and this creates cash flow mismatch problem for IPP’s.
This led to a situation where the bankers were caught in this regulatory tug of war as almost 85 % of the project cost is financed by them and any delay in implementation of project creates a major issue for them. A delay in implementation affects the IPP’s interest service capability to their lenders. Going by the latest available Plant Load Factor statistics as published by Central Electricity Authority as on May 31, 2018 it stands at 57.8 % for Private Power Generating Companies as shown in the table below. Naturally, it’s bankers who are facing the heat of this stressed assets on their books. But, apart from the hysteria surrounding NPA mess very minimal attempt has been made to highlight the challenges these bankers face when they are to decide on financing such projects. Specific to power sector financing, bankers (Public Sector Banks majorly) have to deal with lot of uncertainties which are not known at the time of sanction or at best minimal actionable information is available to them when they sit for decision making. They mostly rely on the Detailed Project Report prepared by a sector expert and base their judgement on the basis of that along with their own guidelines.
The submissions of SBI Chairman, Power Finance Corporation Chairman to the standing committee is produced verbatim to highlight the challenges a financiers face while financing a power sector project where they have unequivocally stated their stand on the same.Way Ahead?
Recently State Bank of India, having one of the largest exposure to this sector proposed a Samadhan Scheme and identified Eleven Projects along with other lenders. Under Samadhan Scheme as formulated by SBI, lenders propose to take equity stake in a project by converting part of unsustainable portion of debt into equity. While developers will get to retain a minor share, the majority shareholding will be offered through bidding to new investors.
The rush of the bankers is also justified given the fact that the deadline for the same is September 1, 2018 and beyond which mandatorily they have to refer the case to NCLT. The Government on its part has also supported the move of bankers by setting up an empowered committee to devise a mechanism to resolve the stress in power sector because it also very well understands the challenges of this sector and there is a consensus among all stakeholder’s maximum of the cases can be resolved without taking the route of IBC baring few as evident from the first list of 11 power plants as short listed by SBI and other lenders.
To conclude, the bankers are not always at fault and to question every decision and put them to scrutiny their every genuine business decision will create a negative hysteria against bankers which will lead to a decision paralysis. Presently, this is what is happening as businesses are suffering on account of slow decision process by bankers on big ticket projects due to excessive scrutiny by investigative agencies for past cases which are ideally a business decision gone wrong and not always a conspiracy and criminality involved in most cases.
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