Resolving Power Sector NPAs - II

Why in news?

• The Allahabad High Court has decided to deny interim relief to power companies from the RBI’s February 12 circular.
• Click here to know more on the case.

What is the RBI's directive?

• The RBI circular sets a 180-day deadline for the resolution of all non-performing assets.
• It requires banks to finalise a resolution plan within this.
• This is in case of a default on large accounts of Rs 20 billion or more.
• Failing this, insolvency proceedings will have to be invoked against the defaulter.
• The assets would be taken to the National Company Law Tribunal (NCLT).
• The central bank also introduced the concept of a one-day default.
• Under this, banks have to identify incipient stress even when repayments are overdue by a day.

What is the petition?

• Nearly 70 large companies with a debt of around Rs 3.8 trillion would have to face Insolvency and Bankruptcy Code proceedings.
• Three-fourths of this debt pertains to a handful of power producers.
• As many as 34 power plants, with a combined capacity of 39 GW, have been identified as stressed assets.
• Power producers were not the only ones hesitant on submitting to the IBC process.
• The government and even the lenders, mostly public sector banks, were also not keen on implementing the RBI circular.
• They argued that the power sector’s problems had more to do with external factors.

Why is the Court's decision significant?

• It is RBI's discretion to decide whether any particular sector deserves regulatory exceptions.
• In this case, it has decided against granting any exception, which is a sound, rule-based approach.
• Any judicial intervention would have sent a wrong signal to other defaulters.
• They would have then started seeking judicial reprieve from the RBI’s circulars.
• So the high court has consciously avoided a precedent that could have been misused.
• It has done its bit by ensuring the RBI’s position as an independent regulator.
• It is not yet clear whether the power producers will move the Supreme Court.
• Till that happens, the RBI deadline stands and banks are bound to start IBC proceedings.

Source: Business Standard