4 April 2019: The Bimal Jalan committee is expected to next week submit its report on the appropriate level of reserves to be maintained by the RBI. According to a report by Bank of America Merrill Lynch (BoAML), the panel will identify excess capital of $14 billion to $42 billion, which can be used to address stressed loans in the power sector.
On Tuesday, the Supreme Court quashed a circular from the central bank forcing banks to initiate insolvency proceedings against defaulting companies. This order has paved the way for restructuring of loans to the power sector.
While this is a relief to both lenders and borrowers it does not address the issue. Lenders did not want to start insolvency proceedings as projects were under implementation and would not find takers.
According to BoAML, the finance ministry should be able to form a much-needed public sector asset reconstruction or asset management company that manages banks’ non-performing assets (NPAs) in power with the Supreme Court ruling against the February 12 RBI circular, which had adopted a one-size-fits-all approach. This had also been proposed by RBI deputy governor Viral Acharya earlier.
“Our power analyst estimates that auctioning these power NPLs will need a haircut of 75%, that is $9 billion (Rs 63,000 crore) more. Banks can then transfer the $9 billion of cleaned-up power NPLs to the ARC/AMC. This can be done by either the government recapitalizing banks by an additional Rs 7,000 crore or it can deploy excess RBI economic capital set to be identified by the Jalan committee next week,” said Indranil Sen Gupta, India Economist with BoAML.
The report said that banks have recognized Rs 2.5 lakh crore of loans in the power sector. After provisions of Rs 1.2 lakh crore and haircut of Rs 63,000 crore, around Rs 70,000 crore worth loans left could be held by an asset reconstruction company by leveraging capital of Rs 7,000 crore, which would need to come from the government.