Around 22% of India’s installed power-generation capacity burdens Indian banks as non-performing assets (NPA). There is little scope of restructuring them through the Insolvency and Bankruptcy Code route, because the problem lies in bankrupt politics that makes state utilities incapable of buying power from generators and not with the generation projects per se. Unless the politics is reformed, buying into power generation will prove a dud investment. Therefore, the scheme the banks have come up with, of converting their debt into equity in the power assets and selling these on to patient capital, makes sense.
However, the banks’ hope that the National Investment and Infrastructure Fund would come forward to willingly hold these assets might prove unrealistic. The banks should partner Power Finance Corporation or PTC India Financial Services to create the patient capital they need. The way forward is to follow through with power tariff reforms and mandate transparency in utility finances. Subventions that may be necessary to meet the ambitious target to supply power for all by December need to be specifically targeted and budgeted upfront. The Reserve Bank of Indiahas, rightly, refused to grant any special treatment for stressed power projects, and their resolution would be as per the RBI’s 180-day timeline.
The Ujwal Discom Assurance Yojana (UDAY) scheme needs close monitoring, including quarterly publication of utility results. States have issued bonds worth .`2.32 lakh crore to take over their utilities’ debt. But with giveaways, patronage of theft and populist giveaways par for the course, the whole UDAY scheme can well come to nought and at a huge national cost. Without reform in the power sector, lending to power cannot be redeemed.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Power sector NPAs are not a banking problem