RBI is right

Govt should reconsider its stand on power sector defaults

The Allahabad High Court is set to hear on Monday the Reserve Bank of India (RBI)’s final submissions on a case filed by power companies against its February 12 circular. The circular had mandated that banks should start the insolvency resolution process of large non-performing assets (NPAs) as soon as it became due. The RBI gave 180 days for this resolution process, after which all the unresolved cases were supposed to go through the insolvency proceedings. The cut-off date was March 1, which meant all unresolved accounts would be subject to the process under the Insolvency and Bankruptcy Code (IBC) by the end of August. However, the power sector producers sought relief from the court. The issue has led to a stand-off between the Central government and the RBI after the former called for both regulatory relief as well as an extension of the deadline for the power sector, which is one of the most financially stressed ones with potential NPAs of ~2.6 trillion.

The other argument is that strict adherence to the IBC for this sector can force banks to accept deep haircuts. That’s because, given the lack of structural reforms, there is a good chance that power sector assets may not attract reasonable bids. The fact is that issues such as low power demand or lack of reliable coal supply etc. are unlikely to disappear in a hurry. Recovery rates in the IBC have hovered around 25 per cent and liquidation will not be desirable either for the promoters or for the government, as existing power capacity will be destroyed. Instead, the government as well as other related agencies have suggested various ways to deal with the NPAs in the power sector. The government has come up with the Sashakt scheme, which is likely to bring relief to banks as they can get rid of the NPAs from their books quickly while hoping for better recovery rates in the future. Two institutions with the highest exposure to the power sector — State Bank of India and Power Finance Corporation — have suggested Samadhan while Rural Electrification Corporation has suggested Pariwartan.

But the RBI should stick to its stand, as most of these alternatives are just a way of kicking the can down the road. The central bank is also right in saying that the law should be applied equally to all. While the government is asking for an exception for the power sector, accepting it would invite more such requests given the rising mountain of NPAs across different sectors. This logic is hard to dispute. One of the key economic reforms undertaken by the current government has been the passage of the IBC, which was cited by Prime Minister Narendra Modi during his speech on the Independence Day as one of his sterling achievements. The IBC holds two key promises when it comes to the resolution of NPAs. One, it provides the framework for getting the best possible price of assets. And two, its application ensures a speedy resolution of assets that would have been otherwise stuck in litigation for decades. Nothing should be done to derail the process.