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In an unprecedented move,Rural Electrification Corp Ltd (REC) is reported to be acquiring the first phase of Abhijeet group's 1,080 MW Jharkhand power project. Though Abhijeet group has denied knowledge of any such news in the Livemint report, other stakeholders in the deal have confirmed the move, adding a caveat that it is still at an unofficial level.
The fact that REC has been proactive in trying to recover its money and are confronting the promoters who have a political backing and have been named as one of the beneficiaries in the coal allocation scandal is creditworthy. The institution is well within its rights to take over the assets and replace the management or try to run it themselves.
REC has disbursed Rs 650 crore to the project as against the sanctioned Rs 2,000 crore for the first phase of the project. The project has been stuck on account of non-payment to the equipment supplier, BHEL. REC has suggested that they will directly pay BHEL and ask NTPC to run the project.
Because of this event, many are expecting that it will be a trend-setter and would make defaulting promoters to take notice. In reality, it is easier said than done.
First, there needs to be a separation between wilful defaulters and those that have defaulted because business cycles have changed. Taking over control from wilful defaulters makes sense rather than from those companies who are affected because the tide has turned.
Lending companies like banks and institutions too have to take part of the blame for the default. They are the ones who have reviewed the situation when the case was presented to them and agreed to lend to the company. And even after the money was disbursed, by regular and closely monitoring the progress of the project, they could have raised red flags in case of any irregularities or delays. Corrective actions could have saved the project and their money. Why wait till the project is completely stalled and the loan becomes a non-performing asset?
Also, while REC has been prudent in selecting NTPC to run the show, the same logic cannot be used for companies in other sectors. For example, whom will the bank go to for running a defaulting textile company or a pharmaceutical company. They themselves do not have the skill sets needed to run a company, nor as the default proves, they have the foresight to assess the problem. It is easier done in case of a power sector loan which to some extent is a natural monopoly, where the company has an agreement with the buyer of power but the same is not true for other sectors. Competitors cannot be trusted to run the company and finding professionals to run the company with the same zeal of a promoter is easier said than done.
We can look at the case of Gokuldas Exports, where the private equity player, one of the biggest in the world -- Blackstone has unable to turnaround the company.
Finally, how will the lenders manage running the scores of small and medium enterprises that are defaulting. As in the case of agriculture loans, where we have not seen any bankers tilling the land to recover their money, writing off loans for corporate sector will be the norm. Managing the companies will only be in exceptional and straight forward cases.
This makes it clear that the lenders would need to do their homework better before disbursing loans. Reading the mind of potential defaulters is an additional skill set they will have to acquire.
