Banks are designing a scheme for bailing out stressed power assets

Illustration: Ajay Mohanty
With the Reserve Bank of India (RBI) declining any special dispensation for the power sector, leading banks are designing a scheme for bailing out stressed assets. The same might be followed during the proceedings under the National Company Law Tribunal (NCLT). The selected assets will be the ones that can meet the RBI’s 180-day deadline for completing resolution proceedings of stressed assets. 

The power ministry had asked the RBI to provide a breather to the power sector in the Insolvency and Bankruptcy Code (IBC) guidelines. The RBI, in February, mandated banks to classify even a one-day delay in debt servicing as default. 

Confirming the development, A K Bhalla, secretary in the ministry of power, said, “The RBI has declined to provide any special dispensation to the power sector. Any resolution has to be worked out in accordance with the timeline and guidelines of the RBI, and lenders are free to choose any resolution path.” 

Sources said the key lenders, which have been planning to design a bailout scheme, would be choosy about the assets. “The plan being worked out by  State Bank of India and other banks meets the RBI’s guidelines. The catch in the guidelines is the timeline. But then, banks will identify projects where the possibility to achieve success is high,” said an executive in the know. 

Leading bankers met last week to draft a proposal for bailing out stressed power assets outside the IBC route.  The initial plan is that banks will identify sustainable debt in an asset and rework the debt-equity at a certain assumed cost. Banks have proposed that an agency similar to the National Investment and Infrastructure Fund can acquire a portion of the equity.

This would leave the promoter with only a nominal stake.

Officials said with this financial engineering, the banks would try and sell off these assets or join hands with some operation and management companies to operate the project.

“Banks are identifying assets that can be worked upon within the stipulated time. There are operational projects with just a fuel issue or indebtedness due to the promoters’ mistake. They need some tweaking. Such projects stand a higher chance of being resolved,” said an executive.

Industry sources said if the plan revived even a few stressed assets, it could become a model for the sector. “The scheme can then also be adopted for projects that have landed in the NCLT. For now, there is no formula for resolving stress in the power sector,” said an executive with a power company.

Power sector experts said unless issues over coal supply and power purchase agreements were addressed, it would be difficult to get the buyers interested.

“Lenders should pursue the government for addressing fuel and power purchase agreement (PPA) issues. The coal shortage has to be eased. The problem is not financial, but even that becomes unsustainable if fuel is not there. Only financial engineering without resolving systemic issues is not an answer,” said A K Khurana, director-general, Association of Power Producers.

SBI’s plan to have an asset management company kind of resolution might be a second such attempt. Last year, state-owned companies such as Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and NTPC were planning to come together to take over the equity and manage operations of the stressed assets. The plan has not seen the light of day yet.

“Unless distribution companies come out with new long-term procurement contracts, the current attempts are mere financial engineering and are not going to provide resolution of issues in the power sector. The sector is showing signs of improvement with growth in power demand and improved industrial activity. However, offer of new PPAs will at least take a few more quarters.” said Debasish Mishra, partner at Deloitte Touche Tohmatsu India LLP.

The stress in the power industry has left SBI with a 30 per cent share in the stressed assets of private power producers. PFC would see close to 14,000 megawatts (Mw) of its projects landing in the NCLT as resolution is difficult for power assets due to regulatory and legal issues. These assets are under consideration by SBI for its new scheme.

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