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  • Power sector bad loans: All you need to know

    Publish Date: August 30, 2018

    India’s total power sector debt is pegged at 1.2 lakh crore. As many as 60 companies owe that money to banks. The non-availability of fuel, cancellation of coal blocks, lack of enough Power Purchase Agreements (PPAs) by states, the inability of promoters to infuse equity and working capital, contractual and tariff related disputes, delay in project implementations are some of the factors responsible for the stress in the power sector.

    Related Read: The problems faced by the Indian Banking Sector

    Here is all you need to know about India’s Power NPA story:

    The Allahabad Court Order

    The Allahabad court on August 27, turned down the petition made by a clutch of private power producers, staying the February 12 circular of the RBI. The central bank tightened bad loan rules last week and reduced deadlines for resolving stressed assets through the February circular. The court instead, asked the government to hold consultations with the RBI to get some relief for the petitioners using the provisions of the RBI Act within 15 days. This order is going to affect as many as 80 large borrowers, who will now face the bankruptcy tribunal.

    Related Read: Important changes to India’s bankruptcy law.

    Currently, there are 34 stressed power plants of which, the debt of 70,000 crore of seven companies may be resolved outside the NCLT as the resolutions. This is a one-time settlement involving a change in management and restructuring. The remaining debt of 1 lakh crore may head for NCLT if the government and RBI are unable to find a resolution. This could have many implications for bank stocks. Click here to read

    The Special Case Claim

    Power companies have claimed their case to be considered as ‘special’ and to be treated differently. The companies cite a parliamentary standing committee of energy report tabled in March that said about Rs 1.75 lakh crore of private investment in power were at the risk of becoming bad assets because of external factors. Read here about the dual regulations faced by public sector banks.

    The standing committee states that the stressed power capacity stands at 40,000MW across 34 projects with an outstanding debt of Rs 1.8 lakh crore. Of these, 17 projects are affected because of coal linkages.

    Related read: The recent recovery in India’s industrial output x

    Floating an AMC/ARC

    An Asset Reconstruction Company is a specialized financial institution that does the business of buying NPAs from banks. This helps banks in cleaning up their balance sheets.

    RBI deputy governor Viral Acharya suggested that forming a public sector (ARC/AMC) that manages banks' power NPAs either directly or by bidding at NCLT auctions, is the only way out. This is backed by the idea that, once the debt gets right-sized, the operating losses should fall considerably. Click here to read more about ARCs.

    Once these write-offs are accepted by lenders, the companies will have steady revenue flows once the debt problem gets sorted.

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