As the RBI’s deadline for banks to either resolve their stressed assets or initiate insolvency proceedings against the loan-defaulting companies expired on August 27, the Allahabad High Court the same day denied interim relief to defaulter corporate power producers against this mandate of the banking regulator.
On February 12, the Reserve Bank of India (RBI) issued a circular with a revised framework for ‘Resolution of Stressed Assets’ — stressed assets are loans that have been partially or fully defaulted on.
Under the new rules, the RBI ordered that lenders to companies defaulting on loans of Rs 2,000 crore or above — as on March 1, 2018 — will have to implement a Resolution Plan within 180 days, or file for insolvency under the Insolvency and Bankruptcy Code (IBC) within 15 days from the expiry of the deadline.
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But, both the defaulting corporates and the power ministry had requested the RBI for a special dispensation for the thermal power generating sector — which has outstanding debt of more than Rs 1.74 lakh crore that is on the verge of becoming ..non-performing assets (NPAs) — citing factors that were ‘outside the control’ of these companies, such as shortages of coal linkage through fuel-supply agreements, lack of long-term power purchase agreements, etc. The roots of the crisis plaguing the sector lie in the Electricity Act, 2003, but that is outside the scope of this article.
The ministry and the corporates had asked for at least 12 to 18 months for the resolution, but the RBI refused. So, a bunch of thermal power generation companies, under the banner of Independent Power Producers’ Association of India, approached the Allahabad High Court. On June 1, the court had granted a reprieve to these companies from facing insolvency proceedings till the finance ministry met with the stakeholders to see if the issue could be resolved.
The RBI had also moved the Supreme Court, and sought a stay order on the proceedings at the Allahabad High Court, but the SC had refused to intervene. The apex court on August 28 is hearing the RBI’s plea to transfer to the SC all petitions against the February 12 circular in various high courts.
The Allahabad High Court’s verdict on August 27 asked the Centre to take action against the defaulting power companies under Section 7 of the RBI Act within 15 days.
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Section 7 of the Reserve Bank of India Act states that “the Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”.
The high court also directed the high-level empowered committee – set up by the BJP-led NDA government at the end of July – to decide on resolution in consultation with the RBI within two months. The high-level empowered committee is headed by cabinet secretary PK Sinha, who is also former power secretary.
Meanwhile, as the RBI’s 180-day deadline ran out, around 70 companies with total outstanding debt of more than Rs 3.8 lakh crore are on the brink of being declared bankrupt, and being put under the hammer at the National Company Law Tribunal (NCLT) for loan recovery. These include 34 thermal-power companies – of which 32 are run by corporate barons including big ones like Adani, Jaypee, Jindal, etc. These were also identified in a report (37th report) of the Parliamentary Standing Committee on Energy that was presented in the Lok Sabha in March.
However, Rajnish Kumar, chairman of State Bank India — which has the biggest exposure to the bad debt of these companies — has told the media that at least seven cases in the power sector are likely to be resolved without being dragged to the NCLT. Besides, banks do have a 15-day window to appoint the legal counsel and resolution professionals for the IBC proceedings, and if they can come up with a resolution for any of the stressed accounts and if that is approved by all lenders, those assets would not go to the NCLT, as bankers are speculating.
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Bankers had been working overtime since the RBI’s February 12 circular to come up with a resolution plan because once these stressed assets go under insolvency proceedings, they would be sold for scrap value. And the banks, which anyway are usually among the last in the line of lenders to be paid, would suffer huge ‘haircuts’ or loan losses, as they would not be able to recover the original amount, thanks to the diminished value of the asset gone bankrupt.
The RBI has tightened these norms for settling bad debt in view of the current state of Indian banks (especially public-sector banks, but also private ones) — the gross non-performing assets (NPAs) of all banks crossed Rs 10 lakh crore this March.
The RBI classifies a loan or an advance as an NPA if its interest and/or instalment of principal remains overdue for a period of 90 days in respect of term loan.
Under the new RBI rules, if a company defaults after March 1, 2018, then the 180 days will be counted from the date of such first default. The RBI also did away with a number of existing debt restructuring schemes, even though banks were given various options to come up with a resolution plan, while introducing the concept of one-day default, whereby banks must identify even a day’s delay in repayment as incipient stress and start a resolution plan.