New Delhi: The government is proceeding with plans to start an asset reconstruction company (ARC) to warehouse stressed power projects and protect their value until demand for power recovers, said a top official.
As part of the plan to prevent their distress sale under the insolvency and bankruptcy code, state-run Rural Electrification Corp. Ltd (REC) will lead the process of applying to the Reserve Bank of India (RBI) for setting up the ARC tentatively named Power Asset Revival through Warehousing and Rehabilitation, or Pariwartan.
“We have initiated the process along with the stakeholders,” said P.V. Ramesh, chairman and managing director, REC. “Along with all power sector PSUs (public sector units) which are on board, there is also significant interest from the public sector and private sector banks.”
There have been concerns that stressed projects have drawn bids for around ?35 lakh per megawatt (MW) under the Insolvency and Bankruptcy Code, a fraction of the ?5 crore per MW needed to build them.
Mint reported on 21 June on the government’s plan to warehouse stressed power projects totalling 25,000 MW under an asset management firm. REC has identified projects with a total debt of around ?1.8 trillion as part of the Pariwartan scheme.
The government has reviewed 34 coal-fuelled power projects, with an estimated debt of ?1.77 trillion. The issues faced by these projects include paucity of funds, lack of power-purchase agreements and absence of fuel security.
The country’s power sector has been one of the highly stressed sectors, with close to ?1 trillion of loans having turned bad or been recast. Around 66 gigawatts (GW) of capacity is facing various degrees of financial stress, including 54.8 GW of coal-based power (44 assets), 6.83 GW of gas-based power (nine assets) and 4.57 GW of hydropower (13 assets).
Lenders also have an exposure of around?3 trillion to these assets, following slow electricity procurement over the last three-four years. According to the RBI, total outstanding loans of scheduled commercial banks to the power sector, including renewables, stood at ?5.65 trillion in March 2018.
The step to form an ARC follows the Allahabad high court denying interim relief to power companies, who had challenged the central bank’s 12 February circular on bad loans.
The RBI, in its circular, tightened norms for settling non-performing loans by allowing lenders to initiate insolvency proceedings against defaulters, besides setting timelines for resolving bad loans.
Although banks were given several options to arrive at a resolution plan, they had 180 days to do so. The central bank also introduced the concept of a one-day default, under which banks have to identify incipient stress even when repayments are overdue by a day.
“Pariwartan will only be for those projects for which there is no market,” said Ramesh.
Earlier, a special dispensation was sought from the Reserve Bank in terms of amendment of ARC regulations and exemptions. That idea has now been dropped with Pariwartan set to be registered as an ARC.
The ‘Pariwartan’ scheme is inspired by the Troubled Asset Relief Programme, or TARP, which was introduced in the US during the 2008 financial crisis.
Some of the scheme’s features include encouraging power producing companies in states to take over such assets, getting state-run NTPC Ltd on board to complete last mile construction and do operations and maintenance and meeting last mile funding requirement..