S.A. Raghu is a banking and economics commentator based in Chennai. He is an economist and CFA by training and his professional career of over 30 years has spanned central banking, project financing and banking technology. He writes for financial news papers on banking, economics and finance .
One of the more important issues on which the RBI is shadow boxing with the Government is that of the power sector NPAs, which turns out to be more a story of all-round mismanagement, miscalculation and inefficiencies rather than one deserving forbearance. Irrespective of which side wins, the economy stands to lose – the NCLT route (which the RBI prefers) will find few takers for these assets, while keeping them in suspended animation will only hurt the banks without adding to power capacity.
In fact the stances of both sides indicate pessimism on any meaningful revival. The RBI feels that liquidation is the cleanest solution while the Government is toying with acronyms such as SAMADHAN (through the SBI) and PARIWARTAN (through REC) both variations of past restructuring schemes which the RBI had abolished in February.
The Parliamentary Standing Committee’s report on the stressed power sector offers enough evidence of the all-round failures. The data, first- 34 power plants are classified as stressed, involving a capacity of 40,000 MW and bank debt exposure of over Rs 1.74 lakh crore. Of this, about 60 per cent of capacity (24,000 MW) has already been commissioned which may sound like good news, until we discover that over a third of this capacity had no power purchase agreements (PPAs) or coal linkages in place, while another 16 per cent had disputed coal block allocations. As for the remaining capacity under construction (15,725 MW), the story is almost the same – about 60 per cent had no PPAs while about 30 per cent had no coal linkages.
Effectively, this meant that about 44 per cent of the capacity (which included fully commissioned plants) had neither fuel supply nor selling arrangements in place, but banks had fully disbursed their loans! A sure fire prescription for non-performance from the word go! As for the remaining 56 per cent, the causes of stress were not linked to absence of coal or PPAs, but to other factors such as the non-honouring of PPAs by distribution companies (discoms), aggressively bid projects, time over-runs and the inability of promoters to bring in additional funds.
At the heart of the problem was an overestimation of power demand and a reckless asset chase wherein, between FY2010 and FY2017, thermal generation capacity expanded at an annual average rate of 11.4 per cent while annual power demand grew by less than 5 per cent. Saddled with excess capacity and muted offtake, discoms preferred to buy power through short-term contracts or from the open market rather than contracted PPAs. But then it was never clear whether the discoms were dishonouring PPAs because of poor financials or because demand was low, although the net effect was to squeeze the power plants.
While externalities like the Court intervention in coal auctions or regulatory hurdles were beyond banks’ control, basic credit appraisal hygiene was lacking – disbursal of loans in full when raw material and selling arrangements were not firmed up, the overestimation of demand for power, amongst others. But to give them credit, perhaps banks were only been trying to fill the space vacated by the specialised development financing institutions such as the IDBI, ICICI and IFCI, which, coincidentally, began disappearing around the same period.
In any case, the unsuitability of bank loans and the lack of project appraisal skills are nowhere better brought out than in power sector funding. The Government also cannot escape blame for the mess. Its policy of favouring state-owned utilities by protecting them from the bidding process led to a pre-emption of PPAs in favour of utilities like NTPC, leaving private power producers stranded when it came to PPAs, a fact that RBI itself had pointed out in the past.
The Government’s tariff policy is another case in point – in the case of a central/state PSU, the tariff could simply be determined by the regulator, but for all other projects, the price of power had to be discovered through bids, which probably explains the ‘aggressive’ bidding of power suppliers, one of the factors blamed for the crisis.
Finally, the issue of forbearance also seems to ride on another perception, that the RBI’s asset classification rules were excessively harsh and needed moderation for specific sectors. In fact, the Parliamentary Standing Committee seemed to suggest the NPA guidelines were an “exercise in sophistry” when viewed against the constraint of “sectoral issues”.
There is a general misunderstanding of the purport of asset classification norms – their real purpose is twofold – one, to prevent banks from overstating the value of their loan assets (and thereby overstating their net worth) and two, to prevent them from booking fictitious income from non-performing assets and overstating their profits. In a financial system, where share prices and executive compensation are market valuation driven, there is even more reason to ensure that accounting rules are not diluted.