A stressed power sector is threatening India’s economy, but its banks have a solution

• A consortium of banks, led by State Bank of India, are planning to form an asset management company to take over and restore the financial health of 14 stressed power plants.
• Since these banks are the main creditors to the firms operating these power projects, they stand to lose the most from the liquidation of these assets.
  
• The Indian government has identified 34 stressed power plants. These assets account for over 40,000 megawatts of power generation and a ₹1.74 trillion in credit from India’s banks.

After a rescue plan for stressed power assets involving a joint venture by state-owned firms like NTPC and Rural Electrification Corp failed to materialise, a group of creditors, led by the State Bank of India, are taking matters into their own hands.

The banks are joining forces to prevent 14 power plants from going under - which will endanger the recovery of billions of dollars worth of loans. Since they are the main creditors to the firms operating these power projects, such as IndiaBulls and KSK Energy, the banks stand to lose the most from the liquidation of these assets.

The move has national implications. There are currently 34 stressed power plants that have been identified by the government. These assets account for over 40,000 megawatts of power generation - a lot of electricity for Indian homes and businesses - and a staggering ₹1.74 trillion in credit from India’s banks, which already have more than ₹9 trillion in bad loans. If they aren’t rescued, India’s non-performing loan problem will go from bad to worse, further endangering the state of our finances.

Swapping debt for equity

These banks have decided to form an asset management company that will take up the ownership of these 14 plants. According to a report in the Economic Times, the lead creditor for each plant will invest ₹100 million while the other creditors will invest an amount that is proportional to their exposure on each project. The fund will also include the contributions of pension funds, the National Investment and Infrastructure Fund (NIIF) and other strategic investors.

Consequently, the debt in each project will receive a rating from an accredited agency. The healthy portion of the debt will be swapped for an equity holding, while the project promoter’s and creditors will be forced to take the unrecoverable portion at a significant discount to its real value. Furthermore, in order to retain their control over the assets, the plant’s owners could reportedly be asked to supplement their investment with fresh equity.

The asset management company will own the assets for a period of up to five years. The banks will also bring a state-owned power firm like NTPC to operate these assets during the recovery period. Finally, the banks will sell the assets, once they reach a certain level of financial health, in order to recover their debts.

The move is expected to result in the quicker resolution of these assets, and also provide the lenders with better valuations on their debt in comparison to an outright bankruptcy.

The plan to form an asset management company is motivated by survival. These creditors are already dealing with weak balance sheets and high provisioning requirements for bad loans. They can’t afford any significant increase in their non-performing loans.

Short on time

The plan is contingent on a number of regulatory and stakeholder approvals. The banks will reportedly finetune the scheme over the next three months and ensure that all power-purchase agreements for these assets are honoured. However, they will also have to contend with an order from India’s central bank in February 2018 that requires stressed assets to be resolved within 180 days of March 1st or submitted to the National Company Law Tribunal (NCLT), a bankruptcy court.

As a result, the banks have until September to implement the scheme, which is when the resolution period on some of the plants expire. In order to prevent this from happening, the Ministry of Power has written to the central bank and the finance minister, Arun Jaitley, to stay the order from the RBI.

The banks will likely try everything they can to prevent these assets from being referred to the NCLT. If this happens, they will be forced to take a large haircut in the ensuing liquidation process, plunging them further into a problem of their own making.