Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, South Asia, IEEFA
The term non-performing assets (NPAs) is almost synonymous with the woes of the Indian banking sector. Reserve Bank of India (RBI) regulations define NPAs as loans or advances for which a borrower has failed to make interest or principal repayments for more than three months (90 days). The banking sector has been grappling with significant NPAs since the global financial crisis of 2008. Before the crisis, bank loan disbursals had surged, propelled by India’s high gross domestic product (GDP) growth and rising investment/ GDP ratio.
Power sector: A major contributor to the NPA problem
The Indian power sector has long contributed to the country’s NPA problem. Despite the government’s efforts, the sector still faces significant challenges. These include delays in project implementation, inadequate fuel supply tie-ups, difficulty/delays in acquiring land and other permits, offtaker risks such as lack of power purchase agreements (PPAs), and cost overruns/non-viability. As a result, banks and financial institutions have accumulated bad debt, impacting their performance. The vast majority of NPAs come from thermal power projects (TPPs), mostly privately owned. According to the 37th Parliamentary Standing Committee on Energy, the Ministry of Power had deemed 34 coal-based TPPs with a total capacity of 40.1 GW “stressed” in March 2018. Combined, these plants had an outstanding debt of Rs1.7 trillion ($23 billion).
The situation is starkly different today. The huge provisioning of bad loans (close to $124 billion over the past five years), robust credit demand and the low amount of new slippages (new NPAs) have contributed to the best health that the banking sector has enjoyed in years. Net NPAs of Indian scheduled commercial banks are down to around 1.3 per cent as of September 2022 from a high of 6.1 per cent in March 2018. The power sector has also largely turned the page on its legacy NPA issues. Analysis done by the Institute for Energy Economics and Financial Analysis (IEEFA) shows that 26 out of the aforementioned 34 stressed assets, with an installed capacity of 21.4 GW, have been resolved partially or fully as of May 2023. Out of these, 11 were resolved via acquisition by a strategic buyer.
India’s short-term reassessment of thermal power
The power sector has been growing dynamically over the last couple of years, with India steadily moving towards achieving its 2030 renewable energy targets. Given the country’s massive clean energy ambitions, renewable energy will lead the next leg of financing in India’s power sector. Global and domestic banking institutions are already the largest providers of debt for under-construction renewable energy projects in India, a trend set to accelerate going forward.
However, the sector has faced several headwinds over the past year, along with rapidly rising power demand from across the country. These factors have led the government to take another look at thermal power as a solution to any power crunch in the foreseeable future. According to the recently released National Electricity Plan, India has an under-construction thermal capacity of 25.5 GW, which is likely to come online during 2022-27. Besides having the potential to derail India’s energy transition journey, greater reliance on coal and gas power also diverts bank financing towards these high carbon-emitting assets, which leads to a locking of capital that could otherwise go to renewable energy assets.
The central government has directed NTPC, the nation’s biggest power producer with an unsaid mandate to provide for the country’s energy security needs, to add a further 7 GW of thermal power units over the coming three years. NTPC also has the ambitious renewable energy target of 60 GW of installed capacity by 2030, the highest among all domestic power producers.
Resolving the remaining power sector NPAs
As previously mentioned, the successful resolution of power sector NPAs has primarily occurred through strategic acquisitions by other sectoral companies. Often, there are arguments that low acquisition ratios and, consequently, higher haircuts have prevented banks from removing stressed assets from their balance sheets. Strategic acquisitions have been successful, as they result in higher bids and lower haircuts for lenders, given the higher value of underlying assets for strategic buyers.
With India’s recent announcement of enhancing its thermal fleet in light of energy security concerns, the resolution of the stranded capacity already present can be a viable alternative. Firstly, it will help prevent scarce capital from flowing into building new thermal assets. Secondly, it will help avoid the buildup of credit and climate risks within the banking system. Lastly, commissioning a new brownfield thermal asset in India takes around two years, so any new plans will face offtake difficulties if power sector dynamics change significantly during that time.
The newly formed Power Finance Corporation (PFC)-REC joint venture, PFC Projects Limited (PPL), and India’s bad bank, National Asset Reconstruction Company Limited (NARCL), can make these acquisitions through partnerships. PFC and REC formed PPL to acquire stressed power assets and bring in strategic investors to operate, maintain and complete them wherever required. On the other hand, the Indian government set up NARCL to resolve the banking sector’s overall stressed assets in a timebound manner, and possibly acquire and aggregate the stressed debt from various lenders to power assets for resolution.
IEEFA has identified a set of six stressed power sector assets, with a combined capacity of 6.1 GW, that are currently marked as NPA accounts and are fit for acquisition by NTPC in collaboration with PPL and NARCL. NTPC has the opportunity to acquire these stressed assets and provide for the short-term power needs of the nation.
Strategic acquisition of stressed assets through PPL and NARCL
Potential acquisition targets for PPL-NTPC include the 600 MW Lanco Amarkantak supercritical thermal plant and the 1800 MW KSK Mahanadi subcritical thermal power plant in Chhattisgarh, and the 1,350 MW Rattan India plant in Nashik, Maharashtra. If acquired by NTPC through PPL, the three plants will add a combined 3.7 GW to NTPC’s thermal fleet, essentially lowering the buildup of new thermal assets by an equivalent amount. For the three assets, NTPC can undertake work on providing coal linkages and PPAs where required, while PPL can provide finance for working capital requirements. Additionally, for all of these plants, PFC-REC are already the lead lenders, and thus have the highest voting share in any resolution process.
For NARCL-NTPC, IEEFA has identified three thermal assets with a combined capacity of 2.3 GW as good acquisition candidates. These include the 540 MW GVK Goindwal Sahib supercritical power plant in Punjab, the 1,200 MW Mutiara Coastal Energen subcritical power plant in Tamil Nadu, and the 600 MW SKS Power Generation subcritical power plant in Chhattisgarh. NARCL’s business model involves paying 15 per cent of the consideration upfront, and issuing security receipts for the remaining 85 per cent, payable on the recovery of loans. This makes it easier to aggregate assets, preserve their value and drive the resolution process. NARCL will receive Rs 306 billion ($3.8 billion) in sovereign guarantees for security receipts. For any asset being resolved under the National Company Law Tribunal, the committee of creditors of an NPA account would be keen to accept a resolution offer from a partnership of NARCL and NTPC, where one provides sovereign-backed security receipts and the other brings in power sector expertise and strong financial backing to restart the project.
Post-acquisition strategy for NTPC
The acquisition of such assets should be just the first step. IEEFA believes that adding thermal assets to NTPC’s new or acquired portfolio will lead to stranded asset risks and harm the company’s environmental, social and governance (ESG) profile. NTPC has a target of installing 60 GW of renewable energy capacity by 2030, which would require securing capital from global ESG investors. Hence, a post-acquisition strategy to retire and repurpose acquired stressed thermal assets will align well with ESG investors and prevent future stranded non-renewable energy assets on NTPC’s books. An example of a power sector utility that has championed the retire and repurpose model for thermal assets is the Italian utility Enel. The company, one of the largest power sector conglomerates globally, runs a Future-e project aiming to retire and repurpose old thermal power assets. Its Teruel power plant in Spain is one of the biggest among such plants being repurposed globally. Enel is currently targeting the repurposing of 48 sites over the 2022-24 period.
NTPC can also explore the burgeoning market for carbon credit trading to further improve returns from repurposed projects. Besides repurposing a site for renewable energy generation, conservation, restoration and land management projects that generate carbon credits are other options for NTPC to investigate. This will further support the case for repurposing through higher project returns.
India is expected to be the fastest growing large economy in the coming decades. An exponential rise in power demand will accompany this unprecedented growth. Installing renewable energy instead of fossil fuels to feed the growing power needs presents India with a significant opportunity to pursue a low-carbon growth trajectory. The current set of unresolved power sector assets provides an opportunity to avoid investing scarce capital into new thermal assets and prevent the buildup of any risks for the banks.