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RBI stringency on NPAs not out of place

On February 12, Reserve Bank of India (RBI) had issued guidelines that help define non-performing assets (NPAs) of banks and lending institutions. These guidelines also put a question mark on around 40,000 mw of power generation projects that are stuck for various reasons. According to the guidelines, power producers are expected to come out with a resolution plan for their stressed projects, within a time frame of 180 days. Failing this, insolvency proceedings will be initiated against the defaulter, which is to say, the power producers.

It is estimated that around 40,000 mw of thermal (mainly coal) power projects are stuck due to inability of finance. This, in turn, is the result of developers not being able to secure coal linkages, sign power purchase agreements, etc. Power producers have of course appealed against the RBI directive and the matter is still pending final resolution.

The question now is what should be the best way to resolve the long-pending matter. If one sees this from a very clinical point of view, there had to be a time-bound measure from RBI because the case of stressed power generation projects has been going on for years on end. Power producers have cited on reason or the other, explaining why their projects were not moving ahead. Lending institutions are also stuck with over Rs.1.5 lakh crore in the form of bad loans. This makes further lending difficult and lends a tag of “non-bankability” to the power sector, at large.

One way to resolve the issue is to take up the stressed projects, on a case to case basis, and devise a bespoke solution. This approach is tenable as every stressed project has its unique fingerprint of difficulties. While some projects are stuck for want of coal linkages, others are stuck for inability to stitch up long-term PPAs.

Having said this, the approach of RBI must also be understood. The apex bank believes that promoters do have the scope to resolve their projects in a time-bound manner. If no resolution is arrived at, it is only befitting that projects be consigned to insolvency-related proceedings.

The bigger point is that the power ministry has targeted to add over 90,000 mw of new power generation capacity in the next 5-7 years. Given this, it is but logical that every effort be put in resolving the 40,000 mw of stressed capacity, and that too, as a time-bound exercise. The RBI’s stance of initiating insolvency-related proceedings after the 180-day deadline is therefore not out of place.

Venugopal Pillai by — August 14, 2018 in Electricity 0
Performing asset, non-performing loan

The financial results for FY18 of two leading lending institutions—Power Finance Corporation (REC) and Rural Electrification Corporation (REC)—were recently announced. As expected, concerns were expected on the loan asset portfolio with respect to non-performing assets (NPAs), especially in the wake of the February 12, 2018 guidelines of Reserve Bank of India. These guidelines aim at making NPA classification more stringent with a view to mitigating the overall incidence of bad loans.

Though PFC and REC are non-banking finance companies (NBFCs) and the guidelines do not strictly apply to them, both, as a matter of prudence, made provisions for NPAs, as per the new guidelines. As both the institutions have significant exposure in the power generation space—a sector of which analysts are not too optimistic—there would naturally be questions about the asset quality.

With the way India’s power demand is likely to rise in the coming years, a power plant can never be a non-performing asset.

While it is true that the power generation sector is going through a placid phase, it is important to realize that prospects are not too bleak. The government has tried to revive stranded private power generation assets, by a two-pronged approach. Under the scheme “Shakti,” an attempt was made to provide coal to power generation assets without a fuel supply agreement. Several IPPs have benefited from this scheme. Now, there is another scheme underway that seeks to procure buy power from private power projects that do not have firm power purchase agreements (PPAs). Called Medium Term PPA Scheme, this program, in its first round, hopes to sew up purchase agreements for 2,500 mw of capacity, for a three-year period. Going by reports, the response to the pre-bid meeting was impressive and there is a feeling that the scheme should be able to formalize the said PPAs, by mid-July 2018.

While power generation is not discussed with the same enthusiasm as it was a decade ago, power demand is poised to grow in the coming years. The Saubhagya scheme, launched in October 2017, has targeted complete national household electrification by April 2019.  REC, which is the nodal agency for Saubhagya, has stated that currently as many as 1 lakh households are getting electrified today, on a daily basis. Saubhagya is expected to create an additional demand of 28,000 mw.

For a lending agency, a stressed power generation plant is a non-performing asset. However, with the way India’s power demand is likely to rise in the coming years, a power plant can never be a non-performing asset. A power generation plant will always be a “performer”; it is only the loan that could be “non-performing”!

This article’s author, Venugopal Pillai, is Editor, T&D India. Views expressed here are personal. The author may be contacted on venugopal.pillai@tndindia.com)

Venugopal Pillai by — June 9, 2018 in Electricity 0