What Does Supreme Court’s Order Quashing RBI’s NPA Circular Mean for the Solar Sector

Currently, there are no stressed solar PV assets in India


Recently, the Supreme Court of India ordered the quashing of a circular issued by the Reserve Bank of India on non-performing assets (NPAs).

According to a PTI report, “The Supreme Court quashed the RBI circular of last year that pertains to the provisions for declaring a company bankrupt even on a one-day overdue.” The bench headed by Justice R F Nariman said, “We have declared the RBI circular ultra vires.”

The RBI, on February 12, 2018, had issued a circular saying that the lenders have to provide for a resolution plan within 180 days in case of a large account of ₹20 billion (~$288 million) and above. It added that if a resolution was not found by August 27, NPA accounts should be sent to bankruptcy courts.

Does this have any bearing on the domestic solar sector?

The solar sector has so far been the beneficiary of loans from public and private sector banks, non-banking financial corporations (NBFCs), foreign investors and development banks.

For instance, in 2017, various development banks made substantial concessional loans to assist the Indian government in its plans to expand solar rooftop installations. According to a report by the Ministry of New and Renewable Energy, concessional loans of around $1.4 billion (~₹88 billion) were made available to domestic money lenders in 2018.

In December 2017YES Bank and EIB collaborated to formulate a renewable energy financing program for India. EIB pledged to provide $200 million for the joint initiative as a 15-year loan. Mercom also reported in April 2017 when the EIB approved a €200 million (~$227 million), 20-year loan to SBI which will be utilized to help develop large scale solar projects in India.

According to Mercom Research, in 2018, the investments in the Indian solar sector totaled over $9.84 billion (₹698.6 billion).

However, public sector banks in the country funded more coal projects than renewable projects in 2017, according to the report issued by the Center for Financial Accountability (CFA), engaged in monitoring financial institutions. Most of the power sector NPAs so far are related to thermal power projects.

According to Rajendra Kumar Parakh, CFO, Vikram Solar, “Hon’ble Supreme Court’s order quashing RBI’s circular that hastened the bankruptcy proceedings comes as a relief for the industry. As a consequence of the order, large borrowers in consultation with lenders can decide the resolution upon a case to case basis. Many stressed assets in the power sector were not able to serve the debt because of delay in payment from state DISCOMs and a shortage of coal linkages, and there were no issues with the fundamentals of their business. The decision would benefit them as now they can work on the resolution plan with banks”.

“As far as the solar sector is concerned, as per the Parliamentary Standing Committee report on stressed assets in the power sector released in 2018, none of the solar assets deployed in India have been declared stressed assets as of now, so the SC quashing RBIs NPA order has no bearing on solar sector in India at this stage,” added Parakh.

When contacted, Vinay Kumar Founder CEO, VARP Power, said, “RBI circular was about how banks must handle loans of companies designated as NPAs. In the power sector, most of the firms are thermal power companies. I do not think the recent development will affect lending to the renewable energy sector as most of the financing has come from non-banking financial corporations (NBFCs).”

If there will be a situation where fewer funds are available, it will be due to the NBFC liquidity crisis which is playing out, added Kumar.

According to a solar project developer, “Though solar sector has not seen any NPAs until now, the days may not be far when we have NPAs especially considering the payment delays in Tamil Nadu and Maharashtra. The delays have been as late as 12 months in some cases.”

The developer further added, “the Supreme Court in its order has told the RBI that there are many reasons for NPAs and unless there is a willful defaulter, don’t term them as NPAs, instead deal with them on a case by case basis. This is a positive point for the solar sector as the developers can argue that the NPAs are caused by the delay in payments by government entities and the developers cannot be considered willful defaulters.”

Mercom had reported in September 2018 when the Ministry of New and Renewable Energy (MNRE) organized a meeting in the national capital with all the relevant stakeholders of the solar sector to discuss the problems faced by solar PV sector in India. Financial institutions had conveyed in the meeting that they do not want to be blamed for not lending to the sector as all of the current bets taken by the developers and policy changes made by the government ends up as risks on the lap of the lenders.

Though the ruling will not affect the solar sector much in the short-term, the order is positive for the industry in the long-term if there are NPAs in the sector. However, the looming fear of NPAs caused by delay in payments is still a worry for the industry.

Image credit: Legaleagle86 at en.wikipedia [CC BY-SA 3.0 or GFDL], via Wikimedia Commons