The Allahabad High Court on Monday refused to grant any relief on Reserve Bank of India’s revised framework on the resolution of stressed assets, a large part of which is in the power sector.
The deadline for the resolution of these stressed assets lapsed on Monday and they now have to face insolvency proceedings.
The RBI, on February 12, issued a circular scrapping all previous restructuring mechanisms such as strategic debt restructuring (SDR). The new rules said that if a borrower delays even by a day the repayment of a loan, the debt would be classified as stressed and the lenders should begin the resolution process. The rules also said that the lenders had to do this within 180 days of the first default, failing which they had to initiate proceedings under the Insolvency and Bankruptcy Code in 15 days.
Delicate issue
“This is a very delicate issue right now,” said Kameswara Rao, partner, PwC.
“The sector is dealing with a cumulative backlog of problems of economic and legal nature such as the cancellation of coal blocks, PPAs not signed or disallowed costs, and land and environmental issues. As none of the underlying issues are properly resolved, a sale process now could see some assets get no suitors, while others may deliver undeserved windfall gains.
Also, given the uncertainty, lenders will end up taking substantial haircuts on their outstanding debt,” he added. “In all, it does not lead to an efficient resolution.”
The power sector accounts for the highest share of banks’ NPAs.
According to the RBI, the total outstanding loans of scheduled commercial banks to the sector stood at ₹5.65 lakh crore as on March 2018. About 80% of this is accounted for by public sector banks with stressed assets in the sector making up a fifth of this exposure.
The power sector, however, maintains that the reasons for this are extraneous and so it approached the Allahabad High Court seeking a special dispensation. This was rejected on Monday.
The Standing Committee on Energy, in its report on the ‘Impact of RBI's Revised Framework for Resolution of Stressed Assets on NPAs in the Electricity Sector’, noted that while the government has accepted the fact that the reasons responsible for stress in the power sector “are at variance with the reasons responsible for stress in other sectors of the economy”, uniform principles of resolution have been introduced across sectors.
“The Committee therefore, recommend that a holistic view should be taken about the systemic constraints rather than a lopsided approach looking at management of NPA only without addressing the genesis of the problem,” the Standing Committee report, submitted earlier this month, said. It added that the ongoing process will likely deepen the crisis in the power sector.
