The banking sector’s overall non-performing assets (NPAs) are already staggeringly high at Rs 8.40 lakh crore, as of the end of December 2017.
The threat has become real after the Reserve Bank of India (RBI) recently issued revised guidelines for early detection and resolution of stressed assets, leaving lenders with little leeway in matters of restructuring of defaulted loans. India’s largest public sector lender, State Bank of India, has gone public with its concerns over RBI’s new guidelines.
Under the new framework, the RBI has abolished half a dozen loan-restructuring mechanisms and instead provided for a stringent 180-day timeframe for banks to agree on a resolution plan in case of a default. Failing that, they will have to initiate insolvency proceedings against the defaulter.
Lenders will have to identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMAs). SMA classification, introduced by the RBI in 2014, is meant to identify early signs of stress in a loan account before it becomes an NPA.
All lenders will have to put in place board-approved policies for resolution of stressed assets under this framework, including timelines for resolution. As soon as there is a default in the borrower’s account with one bank, all lenders will be required to initiate steps to cure the default, either individually or collectively.
If a loan is restructured as per the resolution plan, the asset will remain sub-standard in the books till 20% of the loan is repaid. Normally, it takes 4-5 years for 20% of a loan to be repaid for infrastructure projects, and so banks would continue with provisioning till then, said industry experts.
The odds are high that these cases will land up in the National Company Law Tribunal (NCLT) as no provisioning is required when there is change in ownership of stressed assets.
No buyers for stressed power firms
However, as the entire sector is stressed, banks may not find buyers for assets of bankrupt power companies.
“The revised RBI guidelines will necessitate a revision in the business and restructuring plans of IPPs. The IPPs are concerned that the banks might trigger a change in ownership in many cases,” said Salil Garg, director, corporate ratings, India Ratings and Research. IPPs stand for independent power producers.
A total of 34 private power plants with a combined capacity of slightly over 40,000 MW is stressed. Of this, 20,405 MW is operational while the balance is under construction.
The Parliamentary Standing Committee on Energy has confirmed that investments of Rs 1.75 lakh crore in private power generation are at the risk of being declared NPAs. It has identified fuel shortage, delay in payment by power distribution companies (discoms) and regulatory difficulty in obtaining approval for recovery of extra costs by developers due to conditions amounting to “change in law” as key reasons for generators’ precarious financial health.
The panel, in its report tabled in parliament last month, cautioned against mechanically applying RBI norms to power plants as that could cause more trouble for the sector. The panel noted that there was no consistency in the policy of coal allocation and e-auction of coal. It also recommended that the government should bring stressed power plans out of the NPA status.
The panel had finalised the report before the RBI revised guidelines.
Significantly, gas-based projects with Rs 48,000 crore investments have already been declared NPAs or referred for debt restructuring.
Association of Power Producers (APP), a lobby group of private power producers, has shot off a letter to Kambhampati Hari Babu, chairman, Parliamentary Standing Committee on Energy, seeking his intervention to persuade the RBI to relax the new guidelines.
Public sector banks (PSBs) account for the bulk of the banking industry’s bad loans. For example, with gross NPAs of Rs 2,01,560 crore as of the end of last year, SBI has the highest share in the banking sector’s bad loans, followed by Punjab National Bank with Rs 55,200 crore in bad loans, IDBI Bank Rs 44,542 crore, Bank of India Rs 43,474 crore, Bank of Baroda Rs 41,649 crore, Union Bank of India Rs 38,047 crore and Canara Bank Rs 37,794 crore.
Indian Overseas Bank has gross NPAs of Rs 31,724 crore, Central Bank of India Rs 32,491 crore, UCO Bank Rs 24,308 crore, Allahabad Bank Rs 23,120 crore, Andhra Bank Rs 21,599 crore and Corporation Bank Rs 21,818 crore.
Sunil Srivastava, deputy managing director, SBI, recently expressed concern over the stress in the power sector. In an interview to a TV channel, Srivastava said that after the RBI’s new framework, banks do not have much headroom except for identifying these accounts as NPAs.
According to a recent report by Bank of America Merrill Lynch, the Indian banking sector is staring at potential dud assets of $38 billion from the power sector, even as $53 billion of the $178 billion bank loans to the sector are already stressed.
“Of the $178 billion (nearly Rs 11.7 trillion) debt of the power sector, $53 billion (about Rs 3.5 trillion) is already under stress (primarily to the generation sector) and of this, as much as $38 billion (around Rs 2.5 trillion) has the potential of being written-off as bad loans,” the US-based multinational investment bank report said.
Of the $178 billion loan, the distribution companies have $65 billion, generation companies $77 billion and transmission firms $36 billion. Of the $53 billion of stressed loans, as much as $50 billion are to the generation sector alone, says the report penned by BofA-ML research analysts Amish Shah and Sriharsh Singh.