The Allahabad High Court ruled that a power company can’t be taken to bankruptcy court for not repaying loans unless it has been declared a wilful defaulter, recognising the stress that the sector is under. It also directed the finance secretary to meet power producers in June to discuss their financial woes.
This follows a February directive from the Reserve Bank of India (RBI) asking lenders to resolve stressed loans within 180 days of default, failing which the company had to be referred to the National Company Law Tribunal (NCLT) for resolution.
This was applicable to loans above Rs 2,000 crore for all sectors including companies in power sector that suffered due to several factors such as the inability to sign power purchase agreements (PPAs), delays in government approvals and unavailability of coal. A wilful defaulter is one that has not repaid loans despite having the wherewithal to do so.
As many as 12 companies that have more than Rs 1 lakh crore overdue are classified in the SMA-1 or SMA-2 category, which means that they have not paid their monthly instalments for 30 to 60 days after the due date, according to senior executives at a large bank. SMA stands for special mention account. State Bank of India chairman Rajneesh Kumar said the court’s decision would give banks longer time to try and find a resolution to stressed accounts.
“Banks are in talks with some of these power companies for resolution of loans,” Kumar told ET.
STANDING COMMITTEE REPORT
“Many of the accounts are already classified as bad loans and some will slip into that category soon. The decision is favourable for banks as it gives banks a longer time to do resolution due to the stay by court,” said Kumar. The RBI circular had set March 1 as the reference date for the 180-day period and thus banks had time till the end of August to resolve stressed accounts outside the bankruptcy court.
The bench also referred to an observation made in the 37th report of the standing committee on energy presented in March 2018 with regard to stressed loans. The order highlighted a paragraph from the report that elaborated on the state of power projects while making the point that many were victims of changing circumstance. “Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery,” the report had said.
MEETINGS CALLED OFF
According to the Association of Power Producers, about 70,000 MW of generation capacity faces the threat of liquidation due to the new RBI norms. In the recent past, meetings of the power ministry, RBI and lenders to find ways to resolve stressed loans in the power sector were twice cancelled, according to people with knowledge of the matter.
Measures taken by the government and regulators to resolve the problems of the power sector could take 8-12 months to have an effect, said Association of Power Producers director general Ashok Khurana, adding that the banks needed to give producers more time. However, they should “go after” wilful defaulters, he said.
“If after due deliberations with developers, ministry of power and coal, as directed by the high court, the ministry of finance is able to draw up a timebound action plan to resolve the issues, RBI may consider the necessary dispensations based on action plan and suggestions of MoF,” he said. The parliamentary report cited above said the power sector was under pressure. “Commissioned plants worth thousands of MWs are under severe financial stress and are currently under SMA-1/2 stage or on the brink of becoming NPA,” it said.
“This is due to fuel shortage, sub-optimal loading, untied capacities, absence of FSA and lack of PPA, etc. These projects were commissioned on the basis of national need and demand of electricity, availability of all other essentials required in this regard.
