Recently appointed finance minister Piyush Goyal wants the Reserve Bank of India (RBI) to dilute a circular it issued in February 2018. The circular, which has been a source of contention between the Narendra Modi government and the central bank, essentially states that all large corporate groups which are in loan repayment default to banks will have to go in for bankruptcy proceedings from October 1, 2018.
Essentially, these companies have been given six months from March 1, 2018, to resolve their repayment issues with banks, failing which their specific accounts will be forced to enter bankruptcy proceedings. This circular has set the cat among the pigeons as many politically powerful business groups who have avoided the bankruptcy courts until now are faced with this eventuality. For big groups, the prospect of entering bankruptcy proceedings is a difficult pill to swallow – it harms both their overall reputation and credit rating in the market.
Some of these politically-connected corporate houses, like the Adanis, have publicly claimed that their group companies are in the pink of health and that there was no stress in their balance sheets with regard to loan repayments. The RBI circular obviously exposes many of these claims.
One particular sticking point is that many large corporate houses will have to go to the bankruptcy courts to resolve unpaid power sector loans of close to Rs 2.5 lakh crore. This is the biggest worry for the Modi government.
Politically, it is significant that the RBI has taken a tough stand and this has made the Centre very uncomfortable.
The RBI seems to have called the Centre’s bluff by imposing the most stringent guidelines for defaulters. Neither the prime minister nor the finance minister can publicly complain about the central bank’s move because their government’s political rhetoric was all about taking strong action against big loan defaulters “passed on by the UPA regime”.
All that the central bank appears to have done is simply translate this strong political rhetoric into real action on the ground.
It appears the NDA government may not have desired such a hard landing in a pre-election year.
In a meeting with central bank representatives this week, Goyal explored whether the new NPA guidelines could indeed be watered down. The only meaning of any possible dilution would involve giving defaulting corporate more time to resolve their unpaid loans. Behind closed doors, the finance minister has cleverly couched his arguments around serious policy glitches in the power sector which may have hamstrung the operations of private sector power plants.
The RBI is said to have stood its ground, saying that the February 12 circular cannot be diluted to make an exception for just the power sector. After all, this could spark litigation from those being discriminated against.
It is possible that the massive power sector NPAs and the inability of the banking sector to deal with them has caused Goyal to freshly moot the idea of setting up a ‘bad bank’, an idea that often gains currency only to never really materialise. The most recent instance saw Arun Jaitley also toy with the idea before putting it away.
If the proposed ‘bad bank’ is introduced, industry experts believe that the massive NPAs of the power sector will dominate it.
Conceptually speaking, a bad bank is like a national asset reconstruction company supported by government equity, which is used to ring-fence the banking system’s non-performing assets (NPAs). It then tries to manage or sell those assets with professional help. With the bad bank taking the burden, the idea is that the rest of the banking system can operate smoothly without the burden of the NPAs.
Technically speaking, a bad bank will increase the Centre’s headroom in dealing with the non-performing power sector assets in a discretionary manner. There is less discretion if these companies are forced to go to the National Company Law Tribunal (NCLT), which follows laid-down procedures.
There also appears to be a fear that debt-laden power generation companies may have no takers once they go to NCLT. A bad bank, on the other hand, can directly negotiate with, say NTPC, or some new investor and bring a quicker resolution to the problem. However, it may be less transparent than the proceedings at the NCLT.
In fact, if power sector NPAs are transferred to a bad bank in the next few months then the promoters owning these companies may just have to deal with the government rather than go to the bankruptcy courts from October 1. While the promoters of stressed power firms may prefer this solution on the whole – the bankruptcy process is embarrassingly public – it won’t be that easy for the Modi government.
The finance ministry would have to find a solution for non-repayment of bank dues of over Rs 2 lakh crore for power projects which are mostly non-operational. And there is no guarantee that such a solution will be free of political controversy. And such controversy could get compounded considering that the whole project is now being handled by Goyal, who is seen as the de facto treasurer for the BJP in a pre-election year.
After all, the power sector assets currently under resolution are owned by India’s politically-connected corporate groups, with some of them being seen as very close to the Modi regime. Adding to this messiness is the fact that some of these crony corporate groups are also being actively investigated by Piyush Goyal’s ministry for massive over-invoicing of power sector equipment imports. If these charges are proved, these companies could possibly be categorised as “wilful defaulters”, attracting much more stringent punishment.