SC to hear power firms' plea against RBI's directive on default loans

The Supreme Court (SC) will hear a slew of petitions filed by the power sector industry association and other companies against a Reserve Bank of India’s (RBI’s) directive issued on February 12 on Wednesday. The directive had asked banks to file bankruptcy proceedings against all defaulting loan accounts above Rs 20 billion if a resolution plan was not agreed upon in 180 days.  

The directive has hit close to 80-100 companies from varied sectors, including power and telecom, allied industries, and will send an additional Rs 3.6 trillion worth of debt to the bankruptcy courts.

The RBI in its earlier filings before the Allahabad High Court had said the power sector companies have been chronic defaulters and suppressing facts. It said the regulator cannot make an exception for the industry. According to the RBI, banks have an exposure of Rs 2.2 trillion to the power sector, with 35 companies defaulting on bank loans.

Several India Inc leaders said the RBI circular will not only affect the power sector, but others too, as banks had stopped clearing debt restructuring proposals after the February 12 circular.  “The RBI circular had said no debt recast will be cleared even if one bank has voted against the proposal, irrespective of its voting share,” said the chief executive officer (CEO) of a telecom firm.

“After this, though banks had signed an inter-creditor agreement but didn’t issue operating guidelines, we are back to square one,” said the CEO of a large company. “Over 1,000 companies have already been referred to the National Company Law Tribunal (NCLT), leading to massive job losses. Several more are expected with this directive,” he said.

Lenders, on the other hand, are keenly awaiting the SC’s order on the RBI’s directive. Any order supporting the central bank’s stand will send more companies to the NCLT and they will have to make provisions for it. The earlier deadline of August 27 has already been breached. Thanks to a SC status quo order, lenders have still not taken write-offs on these loans.

The RBI started its bank bad debt clean-up in June 2017, when it sent the first batch of 12 large companies to the NCLT for debt resolution under the Insolvency and Bankruptcy Code. The combined haircut that banks will take on these companies is around 56 per cent. ”If one looks at these 12 large defaulting accounts, only four cases have been resolved so far, while the other cases still remain unresolved even after more than 450 days lapsed since being admitted by the NCLT. According to our analysis, the lenders for these initial 12 companies are estimated to have lost out on Rs 40 billion in additional income due to delays in the resolution process beyond the 270-day period,” said Abhishek Dafria, vice-president & co-head, corporate ratings, Icra.


 
 

 The Tug Of War
 
Power producers’ stand
 

•  There’s preferential treatment for govt power companies; discrimination against private firms
•  Lack of fuel like coal and gas
•  No PPAs signed by state govts, which are mandatory for coal linkages
•  Payment delays by electricity distribution firms
•  RBI has not taken industry woes into account

RBI’s stand

• Can’t make separate rules for power secto
• Power sector has chronic defaulters
• Firms are suppressing facts