The Supreme Court recently struck down the Reserve Bank of India’s (RBI) circular dated February 12, 2018, declaring it ultra vires. The controversial RBI circular had kept the industry on tenterhooks. It mandated defaulters with a loan of more than Rs 20 billion to come up with a resolution plan within 180 days or be taken to the bankruptcy court. While the Supreme Court order has brought relief, RBI’s next steps are now keenly awaited. Industry experts comment on the recent Supreme Court order, the expectations from the central bank’s revised framework and the road ahead for stressed assets in the sector. Excerpts…
What are your views on the recent Supreme Court order on the RBI circular? What will be the impact of the order on stressed asset resolution?
Amit Kapur and Vishrov Mukerjee
The Supreme Court judgment was called upon to examine the validity of the notification by the regulator of the banking industry, issued on February 12, 2018. In striking down the notification under challenge, the Supreme Court defined the overall powers of RBI, holding this specific exercise of power (issuing omnibus circulars that mandate reference to insolvency) as excessive and beyond the domain allocated to RBI. The Supreme Court has ensured that a reasoned, enquiry-based approach is taken before companies are referred under the Insolvency and Bankruptcy Code (IBC).
The judgment has come as a relief to companies that were staring at the certainty of insolvency proceedings even while restructuring processes were under way. It has also created room for the resolution of genuine issues, giving time to companies to complete their processes and the government to address the underlying cause of stress in sectors such as power and steel.
Many of us in the industry had challenged the RBI circular because unfortunately it had ignored some very important sector-specific issues. As a result of this cancellation, everyone has to go back to the drawing board. It is true that at the moment there is some uncertainty. For example, it is not clear if the earlier circulars cancelled by the February 12 circular automatically get revived. A more cautious lender would rather wait for a revised RBI circular than take a call. This uncertainty needs to be removed, and that can be done by RBI itself.
RBI’s circular issued on February 12, 2018 had brought in a sense of loan discipline among borrowers. Also, there was some urgency among the borrowers of reaching a resolution lest they were referred to the National Company Law Tribunal. While we need to wait and watch the next steps of RBI, we expect that the new framework will in no way hinder the existing process of asset resolution. Notwithstanding the scrapping of the February 12 circular, banks will continue to have the option of referring default accounts under IBC in case the resolution plan fails.
What modifications do you see RBI making in the framework for the resolution of stressed assets?
Amit Kapur and Vishrov Mukerjee
Any new framework will have to fulfil the condition imposed by RBI requiring company-specific reference under IBC. It is likely that the new framework will provide a mechanism to identify specific stressed assets, which would be referred under IBC. It may provide a lower threshold for approval (it was 100 per cent under the erstwhile circular) and a slightly more realistic (elongated) timeline for the completion of the restructuring process.
I would rather give my wish list than second-guess RBI. The good part about the February 12 circular was that it had sought to empower lenders, and had permitted a lot of flexibility. However, there had to be unanimity among lenders for a resolution to move ahead, which is very difficult when a large number of lenders are involved. We need to ensure that small lenders, in terms of exposure, are not able to exercise a virtual veto power and stall proceedings. A sizeable majority, say, 60 per cent, should be able to carry the day. My impression is that lenders are excessively risk-averse, and resolution does not happen in such an atmosphere. However, since I do not have an answer to this problem, I am not hazarding it.
We do not want to conjecture on the contours of the revised framework for the resolution of stressed assets that RBI might come out with. However, expectation from industry quarters is that the new framework should take into account the nuances specific to certain sectors instead of a common approach for all sectors.
What, according to you has been lacking in the resolution of stressed power assets? What more can be done?
Amit Kapur and Vishrov Mukerjee
The stressed assets problem in the power sector is a culmination of some structural problems. Several of these issues were identified and elaborated by the 37th and 40th reports of the Parliamentary Standing Committee on Energy. These included boosting demand for power purchase agreements, ensuring adequate fuel supply, providing an appropriate mechanism for timely payment by discoms and reducing regulatory delays in cost approvals. The government has taken a step in the right direction by implementing some of the recommendations of the High Level Empowered Committee. However, urgent steps need to be taken to address the poor financial health of discoms and ensure the timely payment of dues.
As far as the power sector is concerned, it is well known that the stress does not lie in the power generator segment, but elsewhere. Offtaker distribution companies are simply passing on their stress to generators, which are already crippled due to the inability of coal companies and railways to produce and carry coal in the required quantities. Hanging generators from the nearest pole is not going to make these underlying causes disappear. I do not think we can avoid looking at the issue from a sectoral perspective. We need to find sector-specific solutions as the Cabinet Secretary-led committee has done.
The power projects have been stressed for quite some time now. The resolution of such assets cannot be achieved through one standard framework as it does not address the root causes of the problem. The lack of an offtake arrangement, the weak financial position of discoms and the absence of fuel supply linkages are the key issues. Further, the situation is aggravated due to low power deficit, which is largely attributable to the unwillingness of the discoms to purchase power due to their poor financial health. Also, the availability of cheaper power from renewable sources is contributing to the stress in the power sector.
Over the past one and a half years, the government has taken several steps to address these concerns. These include the allocation of long-term coal linkages to power producers with an aggregate capacity of about 9,000 MW under the Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India (SHAKTI) and the launch of two schemes for the procurement of power from plants with untied capacity at a fixed tariff for three years. These are modest attempts at reviving the power sector though they are small compared to the overall magnitude of the problem. On the distribution side, the launch of the Ujwal Discom Assurance Yojana had brought about improvement in the liquidity position of discoms leading to improved collection efficiency of several gencos. However, both have seen some deterioration in recent times. Thus, discoms’ financial and operational improvement should remain a key focus area for the government as stronger discoms ensure adequate power demand and timely payments to creditors including power generation companies.