The NPA problems have been brewing for a number of years. Along the way the RBI and the government have tried various schemes for banks to find a resolution to bad assets. Each of these schemes had fancy acronyms, such as CDR, SDR, S4A, JLF etc., which were wound up because they did not have much success. Now there is a new one, called ICA, under the government’s Sashakt plan to resolve the banking mess.
The Inter-Creditor Agreement (ICA) between banks, which is part of the government’s Sashakt plan, is meeting with some stiff resistance from some private sector banks and almost all foreign banks. The agreement was mooted by the Sunil Mehta committee as the first step to resolve bad or non performing loans (NPAs)
The argument of the private lenders is- even where a loan is in default, they have structured their loans carefully with first charge over some collateral or receivable from some sources. They believe that allowing an SBI or ICICI to negotiate on their behalf will mean they will suffer the same hair cut as other banks who have been less savvy while negotiating the loan. What is worse- signing the loan prevents them from selling their loan to asset reconstruction companies(ARCs). They can only sell to other banks and that too at such heavy discounts that they can’t even think of selling out. What appears to have worried them is the “phone calls” from powerful people asking them why they haven’t signed up.
Legal eagles also say the agreement may give the lead bank far too many rights and too few advantages to dissenters and to those who may have better negotiated their terms. Some also worry that banks may use the ICA to keep accounts from getting into the NCLT (national company law tribunals) under the Insolvency Code which in turn may work well for the current promoters. These lawyers and bankers worry that this may in some way sidestep the clean up being attempted by the RBI through the Insolvency Code and the February circular.
Private sector banks that have followed prudent risk management and have well collateralised loans, may now be forced to take haircuts, possibly on bad terms, through no fault of their own because they have a gun to their head from higher up. Either they sign up to the program or the business and regulatory environment will become very difficult for them. Their hands are tied and they don’t have any other recourse:
The other grouse for the private banks who are holding out is that they can’t take any legal route against the ICA. It is not a government or RBI rule or notification. It is a “voluntary” agreement by banks. Hence it can’t be taken to court at this stage. Once they sign, they fear it may be too late to go to court.
In India, it seems like we always take one step forward and then two steps back. Project Shashank is being pushed through as a result of a number of stressed assets in the power sector getting near the point of being referred to NCLT.
Similar problems are arising for the Indian Bankruptcy Code (IBC). From the Financial Express:
However, a strange twist has recently emerged on the periphery of the IBC. Many stressed assets are on the verge of getting referred to the National Company Law Tribunal (NCLT), as per IBC, for initiation of bankruptcy proceedings after August 27. This is based on the Reserve Bank of India’s circular dated February 12, 2018, to initiate a time-bound process of loan resolution. It stipulates that a non-restructured loan has to be automatically moved into the IBC process after the passage of 180 days, post a default. The power industry and its lenders were lobbying with the RBI to seek waiver for power sector borrowers from this new framework. The Allahabad High Court, on Monday, refused to give any interim relief.
The RBI is correct in its approach of being sector agnostic. In any case, these power plants have been given many opportunities through multiple schemes to come to a resolution.
The stress for most of these plants is reflected in their abysmal plant load factor (PLF). At an average PLF of 54% in July 2018, the private sector power plants are quite far from stability, either operationally or financially. In fact, in many of these instances, low PLF is rooted in the lack of power purchase agreements (PPAs) and/or coal constraints.
It is not difficult to see that many underutilised power plants will start looking in a much better shape starting 6-8 quarters from now. First, India’s power demand can grow at a rate of 6-7% per annum over the next 2-3 years. Then, as the power distribution companies’ balance sheets and profitability improve—aided by the government’s UDAY (Ujwal DISCOM Assurance Yojana) scheme—they are likely to float many more PPAs. Finally, Coal India Limited should be able to enhance its coal supply by a sizeable 85-90 million tonne per annum, over the next two years.
Accordingly, banks and power producers may have a case when they are demanding soft glove treatment for the power industry. If these power plants are referred to the NCLT in their current state, the bids that they receive in the subsequent auction may be awfully low. On the other hand, if they are warehoused as per the Project Sashakt—as has been recommended by the high-powered committee of bankers in July—for 2-3 years, they may not necessitate more than 40-50% haircut for the banks. The latter may not be a bad outcome for the lenders.
There are an awful lot of ifs and buts in predictions of the ability of power plants to strengthen their balance sheets and increase utilisation. Schemes like UDAY have now been around for a number of years and politicians are also unlikely to change electricity pricing with higher PPAs in the run up to general and state elections next year.
Not surprisingly, the government of India—being the main equity holder of the public sector undertaking (PSU) banks—also appears to be warming up to the idea of waiver for the power sector from the RBI’s new framework. This can help buy time to iron out the details of the Project Sashakt. As a promoter, the government cannot be faulted for trying to protect its financial interests by maximising PSU banks’ loan recovery.
But such action would undermine the entire bankruptcy framework. If one sector has success in lobbying to be resolved outside the IBC process, what’s stopping others from following suit? Its a slippery slope when lobbying and favouritism replace due process.
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.