Why in news?
The Allahabad High Court hears petition by power companies against RBI's February 12 circular.
What was the circular on?
- It requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days.
- Failing this would result in insolvency proceedings being invoked against the defaulter.
- This would be as per the Insolvency and Bankruptcy Code (IBC) provisions.
What is the ongoing case?
- By RBI's circular, the unresolved accounts would undergo IBC process by the end of August, 2018.
- However, the power sector producers sought relief from the court.
- Power sector is one of the most financially stressed ones.
- It has potential non-performing assets (NPAs) of Rs 2.6 trillion.
- Hence, the Centre called for regulatory relief for the power sector.
- It also sought an extension of the deadline for the sector.
- The issue has thus led to a stand-off between the Central government and the RBI.
What are the centre's views?
- There is evidently lack of structural reforms in the power sector.
- So there is a good chance that power sector assets may not attract reasonable bids.
- Hence, strict adherence to the IBC for power sector can force banks to accept deep haircuts.
- Moreover, power sector has some issues that are unlikely to disappear in a short time.
- These include low power demand, lack of reliable coal supply, etc.
- Given this, the existing power capacity will also be destroyed if liquidation happens.
- On the other hand, recovery rates in the IBC have hovered just around 25%.
- So liquidation will not be desirable in the power sector either for the promoters or the government.
What are the alternatives?
- The government as well as other related agencies have suggested various ways to deal with power sector NPAs.
- The government has come up with the Sashakt scheme which is likely to bring relief to banks.
- Banks can get rid of the NPAs from their books quickly while hoping for better recovery rates in the future.
- State Bank of India and Power Finance Corporation, with the highest exposure to the power sector, have suggested the Samadhan scheme.
- The Rural Electrification Corporation has suggested the Pariwartan scheme.
What is RBI's stance?
- The RBI is not convinced with the proposed alternatives.
- It relies on the two key promises that IBC holds when it comes to NPAs resolution.
- One, IBC provides the framework for getting the best possible price of assets.
- Secondly, its application ensures a speedy resolution of assets that would have been otherwise stuck in litigation for decades.
- Given these, RBI asserts that nothing should be done to dilute the IBC process.
- So the central bank says that the law should be applied equally to all.
- Accepting exception for the power sector would invite more such requests.
- This is especially true, given the rising mountain of NPAs across different sectors.
Source: Business Standard
Quick Facts
Samadhan Scheme
- Samadhan is the Scheme of Asset Management and Debt Change Structure.
- Under this, the bankers' consortium shortlisted 11 power plants with an overall capacity of over 12 GW, which are either complete or are nearing completion.
- The idea is to carry out an assessment of what would be sustainable debt of these assets.
- The remaining debt which is unsustainable would be converted into equity to be held by the banks.
Pariwartan Scheme
- 'Pariwartan' refers to 'Power Asset Revival through Warehousing and Rehabilitation'.
- This is a Central Government's scheme to protect the value of stressed power projects and prevent their distress sale under the IBC.
- The State-run Rural Electrification Corporation (REC) has identified projects with a total debt of around Rs 1.8 trillion.
- These stressed projects will be housed under an asset management and rehabilitation company (AMRC) that will be owned by financial institutions.
- The promoter’s equity will be reduced to facilitate a transfer of management control and the lenders will convert their debt into equity.
- The AMRC will charge a fee and help complete the projects that are stranded for lack of funds.
