New power sector NPAs: Government, banks have only one option- Public sector AMC/ARC

Sour loans of over USD 51 billion (Rs 1.74 trillion) to the power sector are likely to go to the insolvency courts after the Allahabad High Court ruling and government may be forced to float an asset reconstruction/management company (ARC/AMC) to deal with the issue, a foreign brokerage has said.

Dashing the hope of independent power producers, the Allahabad High Court yesterday turned down their petition challenging the February 12 circular from the Reserve Bank which said if a resolution was not found by August 27 (yesterday) these accounts should be sent to bankruptcy courts. The court instead asked the Centre to talk to the central bank to get some relief for the petitioners using the provisions of the RBI Act within 15 days.

"The only wayout is to form a public sector ARC/AMC that manages banks' power non-performing assets either directly or by bidding at NCLT auctions," analysts at Bank of America Merrill Lynch said today.

It can be noted that the idea of floating such an ARC was already suggested by RBI deputy governor Viral Acharya as well as the Sunil Mehta committee.

The proposed power ARC/AMC will need a seed capital of USD 9 billion, which will be a part of the USD 20-billion bank recapitalisation, the brokerage said, adding it will be a three-step process.

The government will have to infuse USD 26.5 billion into the state-run banks (excluding SBI) in FY19-20 to support a moderate 14 per cent credit growth, it said, adding USD 19.4 billion will be required for 75 per cent haircut on stressed power projects.

Other reports suggested that banks will have to make an incremental provisioning of around Rs 1 trillion if these 60 accounts go to the NCLTs.

The BofA-ML analysts estimated the total stressed assets in power sector at USD 51.6 billion, with banks holding a bulk USD 36.1 billion and dedicated non-bank lenders like Power Finance Corporation and Rural Electrification Corporation having USD 15.5 billion.

Banks have recognised USD 15.3 billion of NPAs in the power sector and have already provided USD 7.6 billion for four assets being resolved in NCLT at 50 per cent of the exposure, it said.

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Banks will transfer the stressed assets to the ARC at 75 per cent haircut and securitise the rest of NPAs into the ARC or AMC (asset management company) paper to seed it.

"As Re 1 of capital pushes up loan supply by Rs 11 at, say, 9 per cent capital-to-risk weighted assets ratio, the balance recapitalisation of USD 0.9 billion will allow banks to securitise USD 9 billion of power loans into ARC/AMC bonds," it said.

The brokerage said the ARC/AMC can "extinguish such paper" as and when it is able to restructure/sell the NPA, or, raise funds from the market, as the cycle turns up.

In a bid to hasten the resolution of bad loans, the RBI on February 12 abolished half a dozen loan restructuring schemes and instead provided for a strict 180-day timeline for banks to agree on a resolution plan in case of a default or else refer the account for bankruptcy.

Finance ministry may soon hold talks with the Reserve Bank to resolve issues faced by the power sector and also seek some relaxation of the February 12 NPA guidelines, sources had said yesterday.

Up to nine commissioned power projects will be impacted by the high court order and banks have mostly provided for these stress projects, they had said.

The finance ministry could ask the RBI to provide 180 days for resolution of stressed power projects with a view to avoiding potential value erosion of operating plants. If suggestions are accepted, banks would get about a year for restructuring their power sector loans of about Rs 1.74 trillion.

Bankers have also drawing comfort from that fact that these accounts, along with some EPC and telecom accounts together constituting around Rs 3.8 trillion, are not part of the RBI's first 40 largest default lists.