Mains Paper 3: Economy | Mobilization of resources
From UPSC perspective, the following things are important:
Prelims level: Not much
Mains level: Role of stalled power sector projects in rising NPAs & methods of their resolution
HC dismisses relief plea of power sector from NPA resolution
- The Allahabad High Court has dismissed a plea from private power producers seeking relief from an RBI diktat to banks to take cognisance of a stressed loan if repayments were missed even by a day
- Across the banking system, about 70 firms with loans of around ₹3.8 lakh crore outstanding were expected to face insolvency proceedings
- Thirty-four of the troubled accounts are from the power sector and constitute nearly 54% (or ₹2.02 lakh crore) of banks’ exposure in these cases
What does RBI mandate say?
- The RBI decision requires banks to complete insolvency resolution proceedings within 180 days of defaults
- Many companies breached the deadline this week
Reasons for the failure of power sector projects
- Fuel shortages due to the cancellation of coal block allotments or lack of supply linkages
- The absence of power purchase agreements signed by State discoms
- Cost overruns due to delayed clearances
Why is the resolution of NPAs from power sector difficult?
- A credible resolution plan may be difficult to construct unless key structural issues such as fuel supply and State discoms’ financial woes are fixed
- The utilisation rate of power plant capacities has been stagnant at around 60%
Why is HC decision a good signal?
- The High Court refused to entertain any obfuscation of the RBI’s regulatory powers or of the sanctity of the Insolvency and Bankruptcy Code to deal with stressed assets
- Granting any relief would have led to pleas for exemption from other sectors too
- The government should display greater urgency in tackling systemic issues in different sectors, but there should be no deviation from the IBC path it has embarked on to fix the banking stress, that is hurting the entire economy