The RBI circular on February 12 suggested that there is going to be an accelerated recognition of non-performing assets (NPAs) and provisioning.
Meanwhile, the country's largest lender State Bank of India (SBI) has also raised the alarm on power sector loans, saying it is a stressed sector not just for them but for the whole banking system.
To discuss the above matter and other issues like discom loans, NCLT cases, PNB dues and the outlook going forward, CNBC-TV18 spoke to Rajnish Kumar, Chairman of State Bank of India.
Below is the verbatim transcript of the interview
Q: The power minister has just ordered PFC and REC not to give any fresh loans to discoms which are making heavy losses, unless they draw up a road map for reducing the losses. Are discom loans becoming a problem again?
A: All the discoms last year agreed to a programme called UDAY under which it decided that the working capital limits will be supported by the banks. As far as PFC and REC is concerned, I am not aware what direction minister has given to them. However, the kind of improvement which was envisaged under UDAY has not taken place to that extent what was anticipated.
Q: Is that the reason the Power minister made the above statement?
A: May be.
Q: There is fear because of RBI February 12 circular, a lot more power assets will go bad – is that a correct assessment?
A: Not really because what the circular does is that some of the accounts where standstill was available in terms of asset classification, is no more available. And if they are 90 days overdue, the account becomes NPA. At first instance of default even if it is for a day in respect of term loan payments, then banks have to start working on resolution plan.
Many of these assets are under stress anyway and various resolution plans including the sale of assets or change of management that is work in progress in most of the cases.
So what the RBI circular does is by August 31, either we find a solution outside NCLT, and if we do not find a solution then the only course available is refer to NCLT and most of these cases will be exposures of Rs 2000 crore and that is why they will be covered under the latest guidelines of Reserve Bank of India.
Q: Earlier this week the power minister said that SBI is quite worried about the loans given to Tata Power, Adani Power – Is there a big problem with these loans and what do you think could be the future here.
A: I think when the minister was responding, he would have meant that SBI on behalf of the lenders, and it is not that SBI is alone.
As far as three coast-based power projects in Gujarat are concerned which are dependent on import from Indonesia, there, there are under recoveries and they are on account of change in law which happened around 2011 or 2012.
The lenders are concerned that three plants because of under recoveries, there is possibility or situation where they may or may not be able to pay.
Q: The stress of these companies, they themselves have made that public – they have offered to GUVNL 51 percent of their stake for one rupee?
A: Sorry, we do not discuss these things in media. I can only say that it is not only SBI but SBI on behalf of all the lenders to these power plants, where the litigation is going on, and it is in lenders view in the public interest that this impasse gets resolved. These are assets of national importance.
Therefore, any asset irrespective of ownership has to be viewed as national asset.
Q: When you said this to the government, what was the response? Did they say they will proactively try to resolve the stress related to the Mundra Power?
A: That is our request to the Gujarat Government and Ministry of Power, not only for these three assets but there are certain suggestions which as a lender to the sector we keep on giving. Moreover, in certain matters government intervention becomes necessary.
Q: Where there any other suggestions or request to the government regarding resolving stress in the power sector because that is the biggest concern now?
A: There is only one problem and that is around the power purchase agreements (PPAs), where in the last two years there have been hardly any long-term PPAs.
We have submitted from lenders perspective or as a sound advice that it is not right strategy for discoms to rely solely on short-term PPAs. The long-term PPAs are in their own interest.
In last one month, the rates at the power exchange have gone beyond Rs 4/unit when we have not hit the summers yet in North India, so the position may worsen for discoms.
Therefore as a matter of strategy, this is our advice and it is for the discoms to accept or not.
Q: Yesterday a parliamentary panel on energy among other things said that the SDR scheme is not efficient and the promoters should be replaced only if they are found negligent? Any comments?
A: No comment to make. Now after the Feb 12 circular of the RBI, the position is very clear on what is to be done. So, unless there is a change in RBI’s circular or regulation as a bank or as lenders we will abide by the RBI regulations or directions in the matter.
Q: What are the changes you would like to see in RBI circular?
A: We are not seeking any changes per se. However, with regards to power sector resolution as a lender, we believe that we should not sell these assets in hasted because the situation according to SBI assessment is that in a year’s time there will be turnaround in power sector.
So, if I have to sell perforce, then there will be a under recovery as far as the lenders are concerned and it may be advisable to hold on to some more time. However, if there are certain guidelines from the regulator and there is no choice before the lenders then there is no choice.
Latha: Just a point outside the power space itself in the first 12 cases that were sent to the Insolvency and Bankruptcy Code (IBC) you are provided for, right? Your provisioning is enough?
A: It may differ from bank to bank. In SBI we are holding nearly 60 percent provision on these cases and in March quarter some more will have to be done on account of the regulatory requirements which in my view should be sufficient and even if there is a either a 2-3 percent shortfall or 2-3 percent gai, the range will be within that only.
Sonia: Because of the new circular in NPA resolution how much do you think your own NPAs and provisioning could increase both in this quarter and next?
A: Mostly, maybe in this quarter. Because some of the cases which were under strategic debt restructuring (SDR) or scheme for sustainable structuring of stressed assets (S4A), there was a standstill available as in regard to the asset classification. So those accounts now will have to be classified as NPA after 90 days overdue. So, to that extent, yes.
However, because all these assets in any case were under stressed assets and banks are working on the resolution for the same - I am talking from SBI perspective in this matter because individual banks they will have their own situation, but with regards to SBI there will be some impact but not major impact let me put it this way.
Latha: Any plans from the government on proactively tackling this stressed power projects? For instances are they asking NTPC to buy any of the stressed power plants?
A: We have not received any communication in regards to how we should handle the situation, because we are seeking government's intervention and mostly around that there should be more power purchase agreement (PPA).
As far as NTPC is concerned they came out with a RFP, where they define certain parameters and within those parameters lenders or the promoters were given a choice to make an offer which has been done by most of the lenders. Offer has been made and then NTPC will evaluate and whatever suits and meets their criteria as well as the pricing expectation. There is a possibility that NTPC may choose to take over a few assets.
Latha: Any idea how many megawatts of power capacity or how many projects NTPC will buy?
A: I don't have a full picture of which banks has offered what. But 10,000 megawatts will be a safe bet.
Sonia: Have Punjab National Bank (PBN) made the payments due to on the letter of undertaking (LoUs)?
A: As on date not yet, but I have always maintained that PNB is a respectable bank and they will do what is right for them and what is right for the banking system.
Latha: Today one of the papers is reporting that they are asking for longer provisioning time, which means there is an intent to pay. But they have not come out and said they will pay. In fact, they are believing that others also are at fault. What happens if they don't pay and it is already March 31st?
A: I will do whatever is required to be done, because something PNB will also have to do and I will also have to do. So, only thing is we have to avoid duplication.