Power play on troubles of the power sector

Power play on troubles of the power sector

The government should address the troubles of the power sector, but IBC must hold.

The Allahabad High Court on Monday dismissed a plea from private power producers seeking relief from an RBI diktat to banks to take cognisance of a stressed loan if repayments were missed even by a day. The RBI decision, of February 12, requires banks to complete insolvency resolution proceedings within 180 days of defaults. Monday also marked the deadline for several cases in which loans were declared bad due to this regulation. Across the banking system, about 70 firms with loans of around ₹3.8 lakh crore outstanding were expected to face insolvency proceedings. Thirty-four of the troubled accounts are from the power sector and constitute nearly 54% (or Rs. 2.02 lakh crore) of banks’ exposure in these cases, according to the credit rating agency ICRA. A Power Ministry report suggests these power producers have planned generation capacities of 39 gigawatts, and are in trouble. This is due to a variety of factors: fuel shortages due to cancellation of coal block allotments or lack of supply linkages; absence of power purchase agreements signed by State discoms; and cost overruns due to delayed clearances. The promoters argued in court that most of the hurdles faced by the power sector were due to external factors and so they should be spared the insolvency stick.

Several bankers and even the government have expressed reservations about the RBI directive. With regard to the power sector, in particular, the worry among bankers is that a credible resolution plan may be difficult to construct unless key structural issues such as fuel supply and State discoms’ financial woes are fixed. To be fair, the power sector has been facing some of these issues since UPA-II. The UPA government had set up a project management group in the Cabinet Secretariat to steer stalled big-ticket investment projects out of regulatory landmines. The NDA government did its bit too, including an overhaul of the process for coal block allotments and the UDAY scheme to rev up State discoms’ finances. But the utilisation rate of power plant capacities has been stagnant at around 60%, indicating that more needs to be done by policymakers. Nonetheless, it is heartening that the High Court refused to entertain any obfuscation of the RBI’s regulatory powers or of the sanctity of the Insolvency and Bankruptcy Code to deal with stressed assets. This should trigger a consolidation in the sector, possibly with deep haircuts for banks. Granting any relief would have led to pleas for exemption from other sectors too. The government should display greater urgency in tackling systemic issues in different sectors, but there should be no deviation from the IBC path it has embarked on to fix the banking stress, that is hurting the entire economy.