| Standing Committee Report Summary (752 KB)
- The Standing Committee on Energy (Chair: Dr. Kambhampati Haribabu) submitted its report on ‘Impact of RBI's Revised Framework for Resolution of Stressed Assets on Non-Performing Assets (NPAs) in the Electricity Sector’ on August 7, 2018. Key observations and recommendations of the Committee include:
- RBI’s new guidelines: Under RBI’s earlier guidelines, an asset was classified as a NPA if the interest or principal instalment of a loan remained overdue for a period of 90 days. Stressed assets were accounts where there was a delay in payment of interest due to financial difficulties of the borrower. The Committee noted that under the previous framework, failure of an asset to service its debt obligation within the prescribed time was considered to be a symptom of a potential NPA. Consequently, the corrective measures were of various grades such as rectification, restructuring, and recovery. However, the new guidelines provide that any failure beyond the prescribed duration (between one to 90 days) will immediately invoke resolution, making revival of a project difficult.
- The Committee noted that most of the non-performing loans are concentrated in a few sectors such as infrastructure, power, iron, steel, and textile. The reasons of stress in each of these sectors are varying. For the power sector, reasons include delay in implementation of projects, non-availability of fuel, delays in land and environment clearances, inability of promoters to infuse additional funds, and weak financial health of the power distribution companies. However, the new guidelines suggest similar tools across sectors to resolve the causes of such stress. The Committee noted that the new guidelines are stringent and do not consider the problems in the electricity sector. These new guidelines will worsen the NPA crisis in the electricity sector. It recommended that instead of adopting a sector agnostic approach towards stress resolution, more specific and sector friendly approaches should be used.
- Revised framework for resolution: The Committee noted that the previous guidelines included several effective mechanisms for resolution of stressed accounts such as corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring, and scheme for sustainable structuring of stressed assets. These older guidelines have been withdrawn by the RBI because with the Insolvency and Bankruptcy Code, 2016 (IBC 2016) being enacted, these schemes are not needed. The Committee noted that these schemes were being used by lenders more to address asset classification instead of effectively resolving the stressed assets. Such asset classification and categorisation are the basis for implementation of any of the schemes for restructuring. It recommended that the new guidelines be revised keeping in mind these schemes.
- The Committee noted that the objective of the revised framework is to ensure prompt action to cure stress in a borrower account as soon as default takes place. The resolution plan must be implemented within 180 days of such default failing which the lenders will have to file for insolvency under the IBC 2016. The Committee observed that 180 days may not be sufficient to find an optimal solution. At least 231 days will be required to complete the process which includes preparation of bidding documents, technical and financial operations, invitation of bids, evaluating them and creating security. Banks and lending institutions also noted that in case of power projects, at least 12 months are needed for efficient resolution. The Committee noted that based on the current timelines, every stressed power project would land up in the National Company Law Tribunal. It recommended that some flexibility should be brought in to these timelines.
- Stressed assets in power sector: The Committee noted that about 66 GW of conventional energy is under various degrees of financial stress. The debt of certain independent power producers exceeded Rs 1.8 lakh crore by the end of 2017. Further, lenders’ action for resolving stressed assets in the electricity sector are facing issues such as sub-optimal bid outcome, small buyer universe, and weak commercial framework. For example, a power project in Chhattisgarh, has received an offer of Rs 2,500 crore against a debt of Rs 8,300 crores, i.e. a hair-cut of about 70%. It noted that such forced sale under the NCLT will not benefit the economy. It recommended that the RBI should consider the problems in the electricity sector that are causing such stress instead of concentrating on the management of NPA only.