The Allahabad High Court judgment denying interim relief for power producers who sought to dilute the Reserve Bank of India’s (RBI) 12 February circular is a welcome step. The central bank’s 12 February circular directs lenders to start the resolution process for stressed assets from the first day of default; if banks fail to achieve this within 180 days, they have to refer the asset to bankruptcy court.
The 180=day deadline for assets which were overdue on 1 March when the circular kicked into effect lapsed on 27 August. Media reports say that 70 large stressed accounts worth over Rs 3.8 lakh crore are under review. In the power sector alone, there are 34 cases amounting to 39 gigawatt of power capacity that have dues of Rs 1.8 lakh crore.
Power producers have contended that they are defaulting because many of their projects are under construction/ not utilised because of factors outside their control such as lack of land acquisition and environmental clearances, and inconsistent fuel supply. At a time when there is a clear lack of buyers for power assets, most are likely to be liquidated, thus destroying value, goes their argument.
While that argument may well have some merits, at the end of the day, it is a commercial bet that has gone wrong. There is a moral hazard in agreeing to the demands of the power producers. RBI regulations have to be sector-agnostic and not cave in to special interest groups.
Still, the Allahabad High Court judgment provides some ways out for power producers. It has asked the government to consult RBI under powers given it by Section 7 of the RBI Act within 15 days, with a view to modifying the 12 February circular. Section 7 empowers the Centre to issue directions to RBI if it “consider(s) necessary in public interest.” Secondly, a government committee on the power sector has been given two months to come up with plan along with RBI.
The first option is a powder keg. While the government is well within its powers to issue directions to RBI, it would do well not to interfere in the regulatory terrain of the central bank in such an arbitrary manner. If the government panders to power producers, it will deal a blow to the sanctity of the insolvency and bankruptcy code (IBC), one of the two big reforms seen since 2014. Remember that with the 12 February circular, RBI has taken an important step in cleaning up the credit culture. Undermining this for short-term gains will inevitably lead to another big bad loan problem some years down the line.
The second option seems more sensible. Even if some cases are admitted by bankruptcy courts, they can be withdrawn later if 90 percent of creditors agree. In the power sector, that can very well happen if there is an out-of-court resolution that happens under the aegis of this committee. But it remains to be seen how practical it is. An asset reconstruction company seems to be a popular option, but funding it remains a big question. Still, the fact remains that even if assets are liquidated, it will clean up balance sheets of banks and enable them to restart lending.
In the ultimate analysis, the problems in the power sector are structural and have been evident for a long time. Periodic bailouts of state electricity boards haven’t helped. There is a spate of reforms needed that will enable power producers get a fair price for electricity, ensure consistency in fuel supply agreements, and maintain power supply contracts as sacrosanct. These, rather than just bailing out companies, should be the areas of focus if the government wants to ensure power for all in a durable manner.