JANUARY 10, 2019

By TIOL Edit Team

NON-PERFORMING Assets (NPAs) have proved to be more intractable than what was projected earlier by the Government. This fact becomes as clear as sunlight after reading three recent reports of Parliament Standing Committee (PSC).

All special initiatives to tackle NPAs have so far proved to be partly effective or ineffective. Another lesson from NPA resolution processes is that they keep growing or coming up again and again, if they are not tackled in a multi-pronged manner. And a major front where action is slow or lacking is policy reforms. Another prong that needs management is heady mix of public interest litigation and judicial activism. This delays or derails projects and results in suspension of operations at many businesses, resulting in loan defaults.

PSC on Finance has thus pressed alarm over the breach of extended, statutory timeline (270 days) encountered in resolution of several large NPAs under the Insolvency and Bankruptcy Code (IBC).

In its report titled 'Banking sector in India - Issues, Challenges and the way forward including Non-Performing Assets/Stressed Assets in Banks/Financial Institutions' PSC observes: "The cases referred to the NCLT under IBC are still quagmired at different points/stages in the whole process. As the timelines and deadlines are an integral and critical part of the legal architecture devised under the IBC, undue delays and circumventing the due process by some entities may derail a progressive legislation and render it infructuous".

Similarly, PSC has concluded that the Asset Reconstruction Companies (ARCs) have become an instrument to park the NPAs of banks. It considers this as a "window-dressing exercise".

Says the Report: "The Committee would therefore recommend that this policy should not be misused in such a manner, as it does not really serve the purpose of resolving the NPAs".

PSC's suggestion to enact a new law for constituting a Public Credit Registry (PCR) merits attention. It would provide for structured sharing of credit information and follow-up action among banks. It believes that such a mechanism will also go a long way in pre-empting/detecting frauds. The report shows alarming rise in frauds in previous year.

We hope the government accepts PSC's recommendation to constitute a committee to evaluate the role, powers and authority of RBI in its entirety in NPAs domain. The proposed panel should also assess the economic impact of RBI's different NPA resolution schemes.

We would urge the Government to enlarge the terms of reference of the Committee to offer precise remedies for other major causes that lead to NPAs.

A significant cause noted by PSC is the inadequacy of long-term lending & allied expertise for funding infrastructure projects. PSC has thus suggested that the Government should revert to the old model of financial institutions (FIs) and the avenues offered to them to raise long-term finance. FIs diluted their specialization in this domain while marching towards universal banking.

The need for long-term loan has also been articulated by PSC on Energy. In its report on Hydro Power, PSC has studied flaws in financing pattern of such projects as a major reason for their becoming NPAs. Of the 16 stalled hydro-electric projects, 10 are stalled due to financial issues.

PSC noted that projects' power tariff in initial years is high when they are funded with loans at 10% interest and maturity of 10-12 years. A 4% reduction in interest rate can reduce the capital cost and power tariff. As put by the Committee, "long term loan at cheaper interest rate is the key to hydro power viability".

It has rightly recommended that the Government should facilitate provision of long-term finance at cheaper rate of interest from all sources including international multilateral institutions.

PSC has appreciated recent practice of two power sector financing public enterprises to sanction loans with tenure of more than 20 years. It also proposed that the Centre should persuade States to stop levying water cess as hydro projects don't consume water. They merely let water pass through hydro turbines for flow into the river.

The Report says: "Committee found that imposition of water cess is not fair considering the provision of 12% of free power to the respective States from the hydro power projects".

PSC on Energy, in another report, has focused on shocking transformation of many fuel starved gas-based power projects as NPAs. As much as 51.2% (14305 MW) of total gas-based power capacity is stalled due to shortage of natural gas. Most of these projects were set up due to hype about gas discoveries in KG basin. The projections about supplies from this offshore basin have gone horribly wrong with no supply since 2013.

In its report captioned 'Stressed/Non-Performing Assets in Gas based Power Plants', PSC stated that an investment of Rs 4-5 crore per MW has been made into these projects. As much as 70-80% of the project cost has been financed by the banks. It means a sum of about Rs. 65,000 crores have been invested into 14,305 MW of stranded capacity, out of which about 50,000 crores have been funded by the banks.

The Report says: "The Committee note that the present condition of the gas-based power plants is largely due to non-fulfillment of commitment regarding supply of domestic gas by the Government. The changes in policy for domestic gas allocation have made these plants unviable jeopardizing the huge public investment".

It adds: "these policy flip-flops crippled the gas based power plants consequently making them stranded. These plants are now unable to service their debt obligations and are on the verge of becoming NPAs".

The Committee has thus mooted holistic approach to this problem. PSC's recommendations include bringing gas under GST and re-start of Power System Development Fund (PSDF) scheme. It aided E-bidding of imported gas by power plants.

PSDF provided for exemptions from applicable taxes and levies/duties. The scheme was launched in 2015 and discontinued in 2017 due to multiple factors including lack of cooperation from the States.

These reports show that there is much more to NPAs than political narrative of telephone banking, a term used by Prime Minister Narendra Modi for crony capitalism. All NPAs are not due to this malaise.

It is high time NPA problem is insulated from politics. It should be treated as a big stumbling block to catalyzing economic growth. This, in turn, would improve revenue mobilization, which is so crucial for injecting new dose of Adrenaline in economy.