NPA uncertainty: Supreme Court decision will muddy the waters further

On Tuesday, the Supreme Court issued an order staying further moves against the distressed power sector by its creditors. It also transferred all the pleas in various courts to itself and directed the Reserve Bank of India (RBI) to maintain the status quo until the plea is heard in November. The relieved Association of Power Producers claims it would allow the companies to come up with resolution plans for about 13 GW of stressed generation assets. In effect, this stays the RBI’s February 12 circular marking loans with a day’s payment delay as subject to procedures under the Insolvency and Bankruptcy Code, with 180 days for resolution. These days would have concluded in end August if that timeline is followed.

It is clear therefore that government statements that the non-performing assets (NPA) crisis is largely behind are unwarranted. Legal action has severely muddied the waters in terms of the resolution of India’s non-performing asset problem. One of the advantages of the IBC process is that it allows for a speedy resolution of outstanding issues. Legal delays won’t produce a sustainable solution to problems caused by underlying structural changes. They will just further the uncertainty about the sector and, by extension, about the asset quality of banks. The RBI has finally taken a firm and zero-tolerance stand on attempts to postpone this reckoning — it would be unfortunate if this is to be compromised. November seems a long way off. It is also far from certain how a rescue of existing stressed assets could be managed.

Many of the investments that have been made were based on assumptions about input supply, power demand, and the availability of power purchase agreements that simply no longer hold. The High Level Empowered Committee, under the chairmanship of the cabinet secretary, examining how to revive the sector, has its work cut out for it, and will have to take some firm decisions — yet it should not be allowed to work under the assumption that the legal system will provide for further delays or that unlimited state resources will be available for a power bailout.

Multiple issues hover on the horizon, affecting several sub-sectors of the generation industry. Coal-based power plants that are currently financially robust will have to install emission control technology, in keeping with the regulations that India requires to combat climate change under its commitments as part of the Paris Agreement. Yet financing for this investment is hard to come by. Gas-based power, meanwhile, has long suffered from an input crunch. Almost a third of the 24-GW gas-based power capacity might find itself stranded. In other words, the problems of the power sector are deeper than the existing NPAs. An overall solution — one that does not compromise on climate change, assigns haircuts that are in keeping with economically reasonable incentives for future lending, and that keeps the best existing plants running — must emerge. The government cannot delay this; and the bankruptcy process must be given a free hand to act to resolve the bad assets that have already emerged. Above all, there must be no further statements from government officials that reflect an undue optimism about the state of the NPA crisis.

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