‘RBI Not In Favour Of Forbearance For Stressed Power Assets’

India's power sector is one of the largest contributors of stressed assets plaguing the financial system. Stressed power projects hold nearly Rs 1.8 lakh crore in loans, which are yet to be classified as bad loans. Bankers fear that unless some collective resolution plan is worked out, loans will turn bad and the recovery on these loans would be low.

On Tuesday, BloombergQuint reported that banks are attempting to set up an asset reconstruction company to help take over ownership of the stressed assets. The plan is currently being worked upon, confirmed Bhalla.

State Bank of India, India's largest public lender, is also working with the power ministry to resolve regulatory issues such as coal availability, PPA availability, tariffs and delays in payments so that the assets can be restructured, he said. "We think if SBI puts pressure then all the lenders will come together. We definitely want to see some of the assets come out of stress."

The Extent Of Stress

Nearly one-fourth of India's coal-based power capacity assessed by the government is seen as unviable, Bhalla said.

The ministry has assessed 40,000 megawatts of coal-based capacity. About 10,000 MW of it has been resolved while 20,000 MW is still under consideration, Bhalla said.

“8,000-10,000 MW of capacity we feel is beyond [resolution] because there’s hardly any progress in those projects.”

Edited Excerpts From the Interview

There is the issue of stressed power assets. What can you tell us about the ongoing negotiations? We believe there are meetings scheduled to try and take this issue forward and find some resolution.

Various efforts are being made to resolve the stress of some of the power sector assets. One set of stress was due to cancellation of coal blocks. Around five to six of the these power projects that had PPAs (power purchase agreements) have been allotted some coal linkage under the auction policy called Shakti (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India). A couple of plants with some discom-related issues are also under the resolution process.

For the remaining projects, we have divided them into two-three buckets. First are power plants which have PPAs, but there are some other issues like aggressive tariff where they can’t service the debt. So, these are the assets which were in the re-structuring process before the RBI circular came in February.

The circular also gave some flexibility to the bankers and SBI had told us that they are looking at finding out a resolution plan. So, SBI held a meeting with all the lenders in Mumbai and they are working on what could be the level of sustainable debt, rating, etc. The Ministry of Power can resolve the other regulatory hurdles once the resolution plan is there.

There are issues of change of ownership in power purchase agreement, fuel supply agreement if it exists or availability of linkage. We are also looking at change in issues vis-à-vis the regulator—the Central or State Electricity Regulatory Commissions—and pass-through costs of the new emission norms. But let the lenders come out with the resolution plan first and we will work on a plan which is acceptable to them.

These are second level issues. But the first point is how do you come up with a structure? Bankers are suggesting some sort of asset management company structure. Such structures have been tried over the last two years even under the power ministry, but nothing has been worked out.

It was not tried in the way it is being done now. In June last year, we had discussed this issue under the chairmanship of the Power Minister at that time. And there was an idea that let the lenders take some haircut. Let the equity of the promoters be converted to the least amount possible and then put it in a special purpose vehicle kind of an instrument.

Now they are looking at funding from institutional finance type of institutions. And get the operation and maintenance done by companies such as NTPC Ltd or other players in the market who can operate these assets.

The progress is much better than earlier. But, lenders have to see if whether even this plan works out or not. It is little complicated in the sense that the power sector is facing a different kind of problem. It is not purely a financial or restructuring problem. It is complemented with issues like coal availability, PPA availability, the tariff on the PPA and the discom delay in payments, which needs to be accounted for. So, these are the other issues that also need to be attended.

That’s why SBI chairman has written to us saying that if you can resolve some of the regulatory issues, this restructuring may be possible at this moment. So, may be if we can work in a complementary manner we may be able to bring some assets out of stress.

But, earlier, the plan was to have a vehicle which was essentially going to be led by NTPC, PFC, REC which could take over this equity in this power plants. That did not work out. Was it reluctance on the part of NTPC, PFC, REC to do so?

No, not at all. It was always lenders who had to come together to form an SPV or whatever asset management company they wanted to house the assets in. NTPC was never supposed to be a part of this SPV or the joint venture company which was being talked about. NTPC is going to operate some of these plants as desired by the lenders or the proposed asset management company.

Problem needs to be attacked from all the sides. We expect that if SBI puts pressure then all the lenders come together. We definitely want to see some of the assets come out of stress.

Would government be willing to put some equity into this AMC-like structure which is being considered? Would there be government participation?

I don’t think there is a scheme which is looking for that kind of equity support from the government. The company has to put in its own equities in its public sector units. I don’t think that’s an issue. Some of the lenders are willing to put in and they are finding financial institutions to put in money.

This issue of stressed power assets has now stretched out for a very long time. As time passes, the debt burden only builds up because the interest keeps piling up, so the proportional of unviable projects is rising. At the economy level, do you not think that the power sector issue has to be resolved now?

It has to be, and it is a good beginning made by the SBI. So, we need to coordinate with them and see if there are regulatory issues which we can help resolve.

We have written to the RBI requesting for some special dispensation for the power sector, which they have not agreed to as they don’t look at sectoral issues separately. Thus the Power Ministry needs to address this. We are working on it. If some resolution is available, then we are very much interested in resolving these assets.

On our part, we have brought in one small pilot project for buying 2,500 MW of power on bidding basis where we have made the model little different, so that the burden of fixed cost is not available, and it is medium-term three-year bidding. If there is demand and generators bid for it, then we will continue with the pilot as regular scheme to supply medium-term power to the discoms.

So, the RBI has not agreed to any forbearance for power sector assets alone.

Yes. We have said that the sectoral issues may be seen differently on which RBI, as a bank regulator, said it doesn’t look at sectoral issues. It is for the Ministry of Power to look at those issues.

So, larger government support is not under consideration at all?

Agencies which are working to resolve these assets are government agencies, whether it is companies like REC, PFC, which have funded some power sector projects. Or when it comes to operating these assets, companies like NTPC can also come onto the scene. From our side,the policy issues, the regulatory issues, the coal-related issues, government is making full efforts to resolve it.

Are you concerned about PFC in particular? Could PFC see rapid deterioration of asset quality in particular?

They have balanced funding. It is not necessary that all the assets they have funded have gone bad. There are assets which are doing well. Both the companies have funded largely government assets also, like discoms and GENCOs of the state governments. Non-performing assets are very small percentage of their lending.

But there is no special dispensation for government power projects anymore. I think RBI has made clear in the past.

Yes, that is true, but stress is not there is these power projects. Their funding is not in large part of power sector.

Has the Power Ministry made an assessment of what megawatt of power capacity is unviable, what is under high level of stress, and what can be resolved?

We have initially looked at 40,000 MW of coal-based capacity. About 10 percent of that has been resolved and 20,000 MW is under discussion of what SBI and other lenders are looking at. About 8000-10,000 MW of the capacity we think is beyond resolution as there is hardly progress in those projects.

In the UDAY scheme, can you give us a sense of what the state report card is right now?

The fourth quarter data has not come from all the states. We are pushing them to upload the data quickly. This will not be audited data as it comes little later. But if we look at losses of nine months in comparison as profit and loss from the balance sheets, then the losses have come down substantially. If it was Rs 30,000 crore for nine-month period of previous year, it has come down to Rs 15,000 crore as total aggregate losses of all the discoms in the nine months of last financial year. So, it is on the decline.

The billing efficiency is on the increase. That is the major issue which we are pushing with the distribution companies. They need to increase the billing and to bring more customers into the billing system to save theft or leakage of power. So, billing efficiency is on the increase. Even if it is a small percentage, it has reached about 83 percent as the nine months data tell us. We need to bring it over 90 percent. Our trajectory is that the losses should not be more than 15 percent. So, some of the states are within the trajectory decided under UDAY scheme but for some of the state are not yet there.

State governments are also approaching the regulators regularly for the tariff revisions. Tariff revisions have taken place and we have accessed the impact of it as well. The revenues of these states have increased by Rs 10,000 crore, purely due to tariff revisions. So, these are the advantages which have come under the UDAY scheme. We expect these to continue and attitudinal and cultural change will come which will finally turn around the discoms.

The ‘cost of supply’ and ‘revenue realised gap’ had to be brought down to zero by FY19. Would it be 50-70 percent of the states that will meet that objective? Give us some idea.

Five to seven states will be beyond 15 percent targeted for FY18 because their losses were very high. UDAY trajectory has allowed them to continue at 15 percent beyond March 2019 because the losses couldn’t have been brought down immediately. But largely the states can come into the trajectory. If there are subsidies released in a timely manner, it will be very much within the range. We are worried for 5-7 states but those are the high-loss making states which will take little longer to improve.

On the issue of complete rural electrification and of taking electricity to all households, what is the government’s timeline?

The plan is there on table. The Saubhagya scheme was launched last September with the idea of connecting each and every household. Money is on the table and it has been sanctioned too. DPR of different states are coming up for sanctioning and approval and the scheme is already under implementation. About 83 percent households in India are electrified. We are pushing for 3.1 crore out of the remaining 17 percent or 3.5 crore. The numbers are are changing everyday. We are working for saturation of some of the identified villages under GramSwaraj Abhiyan.

There are some difficulties in some areas like remoteness, availability of materials, carrying these materials to remote areas. But it is being worked upon in a very systematic manner. There are 54 discoms that have the reach. So, we don’t see any big difficulty in achieving this.

So, is the timeline till financial year 2018-19 to complete the process? Is there any additional spend you are requesting for?

It is till December 2018. We have already been allowed extra spend and to raise extra budgetary resources during the current financial year to Rs 15,000 crore which would be mainly used for Saubhagya. This scheme is for the last-mile household connectivity but real issue is the infrastructure within the Din Dayal Upadhyaya Gram Jyoti Yojana which was sanctioned earlier but is being developed now. Some of the habitations are not connected in bigger states like Uttar Pradesh. So, a lot of money is being provided under the Din Dayal Upadhyaya Gram Jyoti Yojana for strengthening of feeders, replacement of transformers, carrying intensive electrification of villages under which large funds have been provided. In last four years, Rs 24,000 crore have been provided under the Yojana. More than 95 percent contracts are in place and work is going on. That is the real base on which Saubhagya will work. Unless there is infrastructure, household connectivity will not work. So, both the schemes are complementary to each other and there too we have put the target of December 2018.

What you can tell us of the power demand? There have also been sporadic coal supply issues. Please throw some light.

Last year, the (power demand) growth was 5.3 percent. During January-March, there have been 8-10 percent growth month-on-month. So, growth was much more in March at 10,000 MW on a daily average daily, as compared to the year-ago period. But some of this could be due to seasonal fluctuations. But normally, there has been a growth of more than 5 percent. We target growth of 6 percent up to 2022, and we are looking at capacity of more than 520 GW by that time. Largely, it is supposed to come from renewables at 175 GW, and for remaining there is coal, thermal and hydro electricity capacity in the pipeline.

We are adding about 10,000 MW of coal, hydro is being added this year. And 38,000 MW of renewable is added. So, this much capacity is being added in the system. There are PPAs for this capacity which is being added from the government side.

On the coal front, last year we had shortage till August-September. But thereafter, we have been largely able to restore coal supply to power stations. But there are some seasons when the hydro power and wind energy go down and that is when the country’s peak requirement is high. That is also the time when there is a large dependence on the coal-based power generation. So, we have stood the test of last year when the difficulty came. We have stocks of more than 15 million tonnes in the power stations. Some of the power stations are operating with less coal.But Railways ensure that coal is reached in time, unless there are some constraints in some places due to breakdown, longer turnaround time of rakes. We have regular meetings on that front and we keep on addressing these issues. We are trying to push more coal into the pithead power stations to generate more power whenever it is needed.

(This story was first published on BloombergQuint.)

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