[Devansh Srivastava is a fourth-year student at NLIU Bhopal.]
With the aim of resolving stressed assets in the economy, the Reserve Bank of India (RBI), in its circular dated February 12, 2018 (RBI Circular), has directed all Scheduled Commercial Banks in India other than the regional rural banks and all-India financial institutions to implement a time bound resolution plan for their non-performing assets (NPAs). The RBI Circular seeks to replace the existing framework for the resolution of stressed assets with a revised simplified framework, one which is in harmony with the Insolvency and Bankruptcy Code, 2016 (IBC).
Pursuant to the said circular, banks are required to classify the stressed accounts into Special Mention Accounts (SMAs) based on the period for which the amount has been due, according to the following scheme:
> SMA-0 - principal or interest payment or any other amount wholly or partly overdue between 1-30 days;
> SMA-1 - principal or interest payment or any other amount wholly or partly overdue between 31-60 days; and
> SMA-2 - principal or interest payment or any other amount wholly or partly overdue between 61-90 days.
Banks are required to submit a monthly report to the Central Repository of Information on Large Credits (CRILC) on the accounts that get classified as SMAs or jump through the SMA sub-categories. When a debtor is unable to pay the interest or the principal dues for more than 90 days, the same is classified as a NPA by the bank. A leased asset may also become non-performing when it ceases to produce any interest for the banks.
The RBI Circular provides that in relation to any stressed account with aggregate exposure of 20 billion INR or above (large debt), a resolution plan shall be implemented by the banks in 180 days from the date of default. It further states that, for any large debt in existence on March 1, 2018 (Reference Date), a resolution plan shall be implemented within 180 days from the Reference Date. If the same cannot be implemented within the said period, the concerned lenders are required to singly or jointly file an insolvency application before the National Company Law Tribunal (NCLT).
The RBI Circular was issued in the backdrop of mammoth accumulation of the NPAs in inter alia the power sector in India. The 40th Report of the Standing Committee on Energy, tabled in Parliament on August 7, 2018 by the Ministry of Power on the ‘Impact of RBI’s Revised Framework for Resolution of Stressed Assets on NPAs in the Electricity Sector’ (Power Report), states that the high NPA ratio for Indian banks is a sector specific phenomena, limited to sectors like power, iron and steel, textile etc. According to the Power Report, the total outstanding loan given by the banks to the power sector stood at INR 5.65 lakh crore as on March 2018, with 34 thermal power plants being "stressed" and constituting almost one-fifth of the total outstanding loans given to the power sector.
In the previous decade, the Government of India promoted the growth of the core sectors of the economy, including the power sector, by encouraging banks to issue more loans for upcoming projects in such sectors. When the power sector projects were sanctioned by the banks, the government had assured the latter that fuel would be supplied. The demand of power in the country is ever increasing. The high growth rate gave projections of good growth. Consequently, banks issued heavy loans to power projects. However, things did not turn out to be as hunky dory as expected.
The power projects have been hit mainly due to the following reasons:
1. Failure to finalise power purchase agreements:
The largest purchasers of electricity from any power generating company (GENCOM) are the power distribution companies (DISCCOMs) owned by the state governments in India. Some of the GENCOMs failed to secure high value power purchase agreements (PPAs) for the electricity they would generate, the primary reason for the same being the cash crunch in the DISCOMs since they are debt-ridden. Though the demand for electricity has increased, owing to increasing consumption among customers and enhanced outreach of electricity supply to new areas, the DISCOMs are not left with enough purchasing power. Thus, the GENCOMs do not have enough takers for their production.
2. Failure to secure fuel supply agreements or coal linkage:
The GENCOMs have suffered due to shortage of supply of fuel, primarily coal. In Manohar Lal Sharma v. Principal Secretary and Ors, the Supreme Court of India cancelled the allocation of coal blocks made from 1993 to 2010, citing arbitrariness in the allocation of the country’s natural resources. Many of these units were allocated to GENCOMs. The allocated coal blocks were supposed to ensure uninterrupted fuel supply for the GENCOMs. Their cancellation put these projects under significant pressure to finalise new fuel supply agreements (FSAs). The GENCOMs were left with no option but to import coal from other countries such as Indonesia and Australia. The power projects which failed to ensure new FSAs before the term loans taken from the banks became due and payable were consequently classified as stressed accounts.
The Report has enumerated few other causes for the power generating assets to become stressed. They include the inability of the promoters to infuse the equity or working capital, contractual or tariff related disputes, issues related to banks and financial institutions, delay in project implementations leading to cost overrun, and aggressive bidding by developers in PPAs.
The banks may prefer to resolve the accumulated NPA crisis by the following ways:
1. Restructuring the debt:
Restructuring is an act by which the lender grants concessions to the borrower owing to financial difficulty of the borrower. The Appendix to the RBI Circular contains an illustrative list of signs of financial difficulty of any borrower viz. the failure or anticipated failure to make timely payments of instalments, irregularities in cash credit or overdraft accounts, significant delay in project implementation and downward migration of internal or external ratings.
Restructuring of any debt may involve, among other measures, the change in the repayment period, alteration of the repayment amount or the rate of interest or the amount of instalments, refinancing of the loan, or a haircut i.e. a compromise below the outstanding amount.
2. Change in ownership of the debtor
If the debt cannot be successfully restructured, the securities of the corporate debtor, which were the collateral for the term loans, could be pledged by the banks. The banks come together to form a consortium, and may then invoke the pledge upon the collateral for the term loans according to the term loan agreement. This is followed by the auction of the pledged collateral which is initiated by the issue of request for proposals for the acquisition of the collateral securities. In the auction, the highest credit compliant qualified bidder becomes the new owner of the business. Banks can utilise the proceeds of such sale to satisfy their debt. The process is similar to liquidation but it is conducted outside the IBC, through the term loan agreements. Further, it is restricted to the collateral for the term loans.
Before the release of the RBI Circular, banks had the option to resolve the stressed accounts either through the term loan agreements or through the IBC mechanism. The RBI Circular has made it mandatory for every unresolved stressed account to be referred to the NCLT. If the insolvency of the debtor cannot be resolved by the banks by restructuring or change in ownership, they would be left with no option but the liquidation of the debtor through the IBC.
It is believed that harmonising the current system of resolving NPAs with the IBC mechanism would help in efficient resolution of the NPAs. The bankers, however, are not as enthusiastic about choosing the IBC route, for any resolution plan which is brought about through the National Company Law Tribunal may consume a period of another 270 days and may lead to further depreciation of the asset value of the stressed project.
Bankers expect that, under their current form, power companies may end up in liquidation as there are very few takers of these same in the country. Government intervention at every stage of a power sector undertaking deters foreign promoters.
Some of the power projects are still under construction, and it is unlikely that any investor would auction for them. When it comes to the completed ones, the new promoter may have to sell the power produced at higher rates, or may have to re-negotiate the PPAs with the DISCOMs, which would rather prefer a power cut than buying more power. Nonetheless, the RBI Circular would help in the fast-track resolution of the NPAs with the banks, thereby resulting in greater confidence of investors in the lending system in India.
 Writ Petition (Criminal) No. 120 of 2012, delivered on August 25, 2014.