Govt hopes RBI will tread middle path on stressed power assets issue

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In the backdrop of the Allahabad High Court’s decision to not grant relief to privately-owned stressed power projects from the Reserve Bank of India’s (RBI) February 12 order, the government and the central bank are trying to find a solution before the projects go for insolvency proceedings. 

A high-level empowered committee headed by Cabinet Secretary PK Sinha will meet on Friday to take a call on issues related to the stressed power assets that the government plans to take up with the central bank.

Moreover, the finance ministry and the RBI are keeping informal channels of communication open and discussing if any sort of compromise can be made by giving an additional 180 days for resolution of some of the power projects. 

The government has to take a decision, in consultation with the RBI, before September 11, on whether a formula can be found to solve the vexed issue.

There are three options before the committee, which has representatives from the ministries of railways, finance, power, coal, and key sector lenders. One is to let all the 34 stressed assets with a cumulative debt of Rs 1.74 trillion go for insolvency proceedings and therefore liquidation.

The second is whether the government is in favour of giving an unprecedented directive to the RBI for giving an additional 180 days for resolution of eight thermal power projects commissioned before the contentious circular is issued by the banking regulator on February 12.

According to Section 7 of the RBI Act 1934, the central government may issue directions to the RBI which are binding in nature as it may “consider necessary in public interest” after consultation with the RBI governor.

The third thought process within the government is that issuing directions to the RBI may not solve any purpose if sectoral issues in the power sector are not addressed.

Business Standard has learnt from senior government sources that the political leadership is categorically against giving any order or directive to the central bank under Section 7. “There is no precedent for this and there is a reason for that. Invoking Section 7 is a slippery slope for any government, as it sets the marker for interference in the financial regulator’s functioning,” said an official.

A second official added that the law per se is not clear if it relates to the government’s directions only to the management of the RBI or policy decisions as well, which is what the February 12 circular comes under. 

In its case to the high court, the government had asked for an additional 180 days to resolve the stressed power assets that have a total capacity of 12,000 megawatts. 

However, the RBI had strongly contested against giving any sector-specific relaxation on its February 12 circular. It had given a 180-day deadline, beginning March 1, to banks for finalising a resolution plan in case of default on assets above Rs 20 billion or face insolvency proceedings.

Government officials are optimistic that the RBI may now agree to some relaxations in light of the court’s observation. 

The high court, in its order on Monday, observed that it would be appropriate for the “central government to step in” and decide if it wants to issue directions to the RBI, according to Section 7 of the RBI Act.