Tougher RBI Stance On Government Projects Hits Power Finance Corporation

Power Finance Corporation Ltd. (PFC), which has had a fairly predictable run of earnings so far, had a nasty surprise in store for investors in the fourth quarter. The non banking financial company, which lends, as its name suggests, to the power sector, reported a surprise loss and a surge in bad loans during the January-March period.

Net loss for the fourth quarter stood at Rs 3,410 crore compared to a profit of Rs 1,260 crore in the same quarter last year. The culprit was a surge in reported non-performing assets (NPAs) and provisioning against them.

PFC saw impaired loans, which includes NPAs and restructured advances, rise to Rs 86,200 crore in the fourth quarter, compared to Rs 36,700 crore in the third quarter. That's a net addition of nearly Rs 50,000 crore in bad loans. The gross NPA ratio shot up to 12.5 percent in the fourth quarter from 3.01 percent.

What Went Wrong?

As part of the disclosures, the lender said that a large chunk of loans had to be reclassified as bad loans or restructured assets after PFC shifted towards the Reserve Bank of India's (RBI) prudential norms and abandoned Ministry of Power (MoP) and Government of India (GoI) norms that it used to follow so far.

"As regards implementation of RBI restructuring norms, (shifting from MoP, GoI approved restructuring norms), based on the various correspondence exchanged, RBI in letter dated 11.04.2017 has stated that in case of a government sector account, if the project has not commenced commercial operation within DCCO (Date of Commencement Of Commercial Operations) envisaged at the time of financial closure (or revised DCCO within the permissible thresholds as given in RBI norms for restructured advances) the classification has to be done project-wise instead of borrower wise till 31.03.2022."

This meant that Rs 59,000 crore in loans had to be reclassified as NPAs or restructured accounts, PFC's management told analysts on a conference call on Tuesday after earnings were announced. Of this, Rs 36,000 crore fell into the restructured category while a little more than Rs 23,000 crore got tagged as NPAs. The management clarified that these are all central or state government projects and added that the principal and interest on these accounts is being serviced.

Why then did the company need to downgrade these loans? Because these projects were delayed beyond the time frame acceptable under the RBI's prudential norms.

The master circular on the prudential norms dated July 1 2014, say that a loan for an infrastructure project “will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery...” If the account is restructured, it will be considered standard only if it is restructured within two years of the original DCCO.

Banks already go by this rule but PFC, by virtue of being a sector-focused NBFC, had not been following this rule consistently.

The management in the conference call said that the RBI norms were being followed in the case of project loans for electricity generation after April 1, 2015. For loans given before that date, PFC was following a far more liberal set of norms where bad loan classification was based only on the repayment of interest and principal.

“RBI's contention is that as a regulator, I make no difference between a private sector borrower and a public sector borrower. Everybody has to be on par,” said Rajeev Kumar, chairman and managing director of the company on the conference call. He, however, added that he expects most of these accounts to be upgraded between fiscal 2018 and fiscal 2019.

Vinayak Chatterjee, chairman of consulting firm Feedback Ventures says that the RBI asking PFC to go by the prudential norms is the right thing to do as PFC is a listed entity even if it is largely government-owned. Chatterjee noted that if a loan has been extended to a special purpose vehicle (SPV), then the SPV should be treated as a company and should be on par with any other organisation even if it is a government owned SPV. Chatterjee, further added, that over the years, the nature of lending to government projects has shifted from loans given to government departments, who then use the money for individual projects, to loans given directly to SPVs created for implementation of individual projects.

Ratnam Raju Nakka, associate director at India Ratings & Research said that the RBI is ensuring that there is parity between NBFCs and banks in lending norms. Scheduled banks have already been following the DCCO-linked rules for classifying projects as NPAs if required, he said.

While it is unclear whether the RBI's directions extend specifically to power projects or all projects, Nakka said that maximum delays have been seen in the case of thermal power plants.

Iron and steel, power, infrastructure and telecom are some of the sectors where stressed loans of close to Rs 10 lakh crore are concentrated. While some sectors, like steel, have seen an improvement in operating conditions, others like power and telecom have seen deterioration. In its February 2017, corporate health tracker report, brokerage house Credit Suisse had pointed out that 67 percent of power sector debt lies with companies which have an interest coverage ratio of less than 1, which suggests that their earnings are inadequate to cover interest payments.