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Since the past one year, articles on non-performing assets (NPAs) have been making rounds of newspapers across the country. With the increase in losses and scams resulting in falling of public confidence with the banking system, it is the need of the hour that the government, RBI along with other stakeholders addresses the issue of NPAs. Public sector banks are most hit by lending to private players, especially those belonging to steel, power, telecom, infrastructure and textile sectors. These five sectors constitute about 60% of the stressed assets on the accounting books of Indian banks. Out of the above mentioned five sectors, power sector contributes about 35% of the NPAs (ZeeBiz, 2017). The government called upon the public sector banks to finance the private players in the power sector. This was done with an aim to bring in more private participation and healthy competition. This made the generation of NPAs of the power sector different from other sectors (Chandrasekhar, 2018). This article is an attempt to examine the effect of the power sector on the NPA crisis.

With the aim of bringing in a market-friendly regime, transparency and efficiency, the government undertook several reforms. The reforms enabled setting up of central and state level electricity regulators, changes in pricing structure and encouragement for production of renewable energy. The reforms resulted in a boost to renewable energy especially solar energy which witnessed a huge fall in its tariff. Falling pricing of solar energy also resulted in a fall in prices of thermal and other energies due to increasing competition. The fall in prices led to a renegotiation of existing Power Purchasing Agreements (PPAs). Power purchase agreements are agreements in which the generating companies enter into an agreement with supplying firms. The power then reaches to consumers whether through their own or hired distribution facilities. PPAs also decide the viability and profitability of the projects. According to CRISIL, in 2017 renegotiating the existing PPAs resulted in risk for investment worth Rs. 48000 crores (CRISIL, 2018).[1]  Furthermore, as per the Parliamentary Standing Committee on Energy, about one-third of the commissioned projects have no PPAs in place (Lok Sabha Secretariat, 2018). The distribution companies chose to procure power from the open market which was cheaper than entering into the PPAs. Renegotiation and lack of PPAs have resulted in cost overrun and stress on the assets of the banking sector.

Besides this, there are losses due to the non-operational projects as well as due to the under-utilization of the existing projects. As per the report of the Parliamentary Standing Committee, there is an overall reduction in the plant load factor (the average output of power from the plant against maximum output) of the thermal power plant from 78.80% in 2006-07 to 60.01% in 2016-17. It has also come under notice that the decision taken for setting up a power plant is taken by the concerned developer on his assessment with little or no expertise. The promoters of the power company were unable to provide the required finance through markets for the completion of the project. In a note presented on 6th September 2018 to the government, Raghuram Rajan, former RBI governor stated that much of the NPAs were created by the loans given out from 2006-08 when the Indian economy was booming; healthy economy resulted in the timely and efficient completion of the then existing projects. Due to a healthy economy and a positive past experience banks felt encouraged to lend further. However, the banks facilitated these loans by no or little due diligence and poor expertise. He also picked upon the corporate governance of issues with the banking sector. Most of the banks practice of having the same managing director and/or other heads for a long duration; this may resulting in favouritism by the bank heads to certain business heads (Rajan, 2018).

What comes through this situation is an inappropriate projection of sustenance for the power sector, falling returns from existing plants and lower sales realization. The consequences of this situation are increasing NPAs for the banking institution, who in due course being bailed out by the government through recapitalization and infusion of public money. On the other hand, banks to compensate the losses generated by these NPAs and writing-off of loans have reduced the interest rates of people’s saving accounts and implemented various arbitrary charges. Thus, this shift of burden on the public has resulted in the fall of public confidence in the banking system. The government and RBI should ensure to restore the shaken faith of public and act to protect the public interest at large. 

[1] Renegotiation leads to project cost overruns escalated for stalled projects and they became increasingly unable to service debt.

References

Chandrasekhar, C.P. (2018, September 15). Non-performing Power Sector Assets Signalling a Larger Crisis. Economic & Political Weekly, 53 (37), 10-11.

CRISIL (2018). Webinar: Solving the NPA puzzle in the power sector. Retrieved from https://www.crisil.com/en/home/events/infra-intelligence/2018/solving-the-npa-puzzle-in-the-power-sector.html

Dutta, S. & Kumar, R. (2017, August 26). India’s Thermal Power Projects are Making Even our Public-Sector Banks Sick. Centre for Financial Accountability. Retrieved from http://www.cenfa.org/coal/indias-thermal-power-projects-are-making-even-our-public-sector-banks-sick/

Kumar, R. & Nishank. (2018, September 6). A Critique of Report on ‘Stressed/Non-Performing Assets in Electricity Sector.’ Centre for Financial Accountability. Retrieved from http://www.cenfa.org/publications/a-critique-of-report-on-stressed-non-performing-assets-in-electricity-sector/

Lok Sabha Secretariat (2018). Stressed/NPA in electricity sector 37th report. New Delhi: Lok Sabha Secretariat.

Raghu, R.G. (2018, September 6). Note to Parliamentary Estimates Committee on Bank NPAs.

Shrivastava, R. (2018, September 12). Raghuram Rajan, NPAs and a war of words: All you need to know. India Today. Retrieved from https://www.indiatoday.in/business/story/raghuram-rajan-npas-and-a-war-of-words-all-you-need-to-know-1338460-2018-09-12

ZeeBiz (2017, June 13). Top five sectors with most exposure to banks NPAs; What can be done? Retrieved from http://www.zeebiz.com/india/news-top-five-sectors-with-most-exposure-to-banks-npas-what-can-be-done-17462

Image credit: Collinss Sunday Okobi

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Written By Dhanashree Gurudu

She is a M.A Regulatory Governance post-graduate from Tata Istitute of Social Sciences, Mumbai.

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