After steel, next up are power sector's NPAs; innovative solutions need to be found

Jitendra Gupta

Moneycontrol Research

A sizeable chunk of bank loans are to the power sector where many projects have little or no economic value. Private sectors players like Tata Power, Adani Power, GMR and others want to exit some of these projects, but are not finding takers. The few buyers who have expressed interest are demanding a hefty discount. Recently, SREI bid for one of GMR’s gas based 768 MW power plant in Rajahmundry, where the terms indicated that the banks will have to take a 50 percent haircut on the outstanding debt.

Nevertheless, government and banks are looking for innovative ways to deal with the issue. According to a section of the media, banks have identified nine such stressed projects which could be managed by NTPC without any financial liability or commitment.

It is expected that some of these projects might get bundled into a separate entity managed by NTPC. Most of these projects will require huge equity infusion to make them viable. One workable solution would be for the banks to convert some of their debt to equity and bring in additional equity probably from the government (through NTPC) or other investors.

Many of these troubled assets have huge execution issues; but NTPC’s existing operations will not be impacted unless the entire burden of ownership falls on NTPC. However, owning these assets will inflate its own debt to equity and deteriorate its credit rating and exert pressure on financials, which will have an impact on the lenders as well.

In all probability, these assets will remain in the books of the banks. Any equity investor would be interested if these assets offer a decent return in the region of about 14-18 percent.

Hypothetically, to construct a new 10,000 MW of (coal-based) power capacity today would cost around Rs 80,000 crore. With the debt to equity of 70:30, it will require close to Rs 24,000 crore of equity. Now, if 10,000 MW of stressed power assets are bundled, since there is no equity left, the project cost will increase to Rs 104,000 crore. (Rs 80,000 crore being original cost and Rs 24,000 crore of new infusion by the banks). At that cost, there will be hardly any return on equity because the competitive tariffs (based on 14-16 return on equity) will be largely set at the project cost of Rs 80,000 crore. This effectively means if equity investors have to come in these projects, the banks will have to take a hit, which may vary depending on the cost overrun during the period of construction and capitalisation of losses during the period of operation.

The only silver lining is that the related debt in the books of the companies that are holding these assets and incurring expenses such as interest cost, will come down significantly as the debt will be knocked off from the balance sheet of these companies.

But it is too simplistic to remotely suggest that the assets taken over by the banks can be turned around. Most of these companies are or about to go for the insolvency proceedings as their business viability has completely eroded.

For instance, in the case of Lanco Infra the banks have been directed by the RBI to initiate corporate insolvency process. In this case, since there is no equity and the assets aren’t enough to pay back the debt, there will be very little left for the equity investors. To put the numbers in perspective, Lanco has got close to Rs 50,000 crore debt on its books as against the net fixed asset value of about Rs 20,000 crore, indicating that there is a huge gap to be covered and the possibly of deep haircut that the banks will take as the asset goes for resolution.

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