Despite the Supreme Court having de-allocated 214 out of the 218 coal blocks which were issued between 1993 and 2009, Reserve Bank of India (RBI) Governor Raghuram Rajan has said that the system is flexible enough to deal with banks’ loans to affected coal companies. Analysts feel that financial institutions should not unduly worry about their exposure turning into non-performing assets (NPAs), as long as the reserves are functioning.
The decision by the apex court, they added, may at best affect the profitability of the companies owning the blocks marginally, but the loans will not turn bad, industry watchers feel.
“As long as the physical assets are intact, banks will not be unduly worried (about their loans given to coal companies whose blocks have been cancelled, turning NPAs. 40 coal blocks, which have been given time till March 2015 to finish operations, are currently functioning, therefore the banks can expect to breathe easy,” said Debashish Mishra, Senior Director, Consulting, Deloitte Touche Tohmatsu India Pvt ltd.
According to the Supreme Court’s order, after March 31, 2015, the control of these 40 blocks will go to Coal India ltd (CIl) till the time the Government starts the auction process.
“Unless the Government quickly starts the auction process of these 40 blocks after the March 31, 2015 deadlines ends, the banks’ exposure to coal companies should not be under any risk of turning into NPAs,” said an analyst on condition of anonymity.
He added that quick decision making by the Government will keep the possibility of the money coming back to the banks, strong. The only downside of the apex court’s decision, he added, could be that the profitability of the companies owning the cancelled blocks, may go down.
“However this too will be affected by only 7 per cent to 10 per cent,” the analyst said. Industry watchers said that the fact that the 40 blocks are operational, will ensure that returns will keep on coming and this will not affect the profitability of the companies adversely.
Rajan last week had said after the bi-monthly review of the monetary policy, that there is already "fair amount of flexibility" in the system to deal with loans impacted by the Supreme Court order to de-allocate 214 coal blocks.
“I will reiterate that whenever we have issues of flexibility coming up, the real issue is putting the asset back on track, recovering the loan, etc. It’s not about postponing recognition of the problem and let's keep that in mind,” Rajan had said. He was replying to a specific question on bankers saying that they may ask for some flexibility from RBI in showing some "regulatory forbearance" in the face of the Supreme Court order last week.
"I think there is fair amount of flexibility already built into our approach and I think it would be premature to judge questions of flexibility," Rajan said. He had further observed that the opportunity to reform by starting afresh on exploiting the coal reserves, the fourth largest in the world, is the "silver lining" in the whole issue.
The Supreme Court decision to cancel the allocation of 214 coal blocks will have bearing on thermal power plants, in which the banks have put in more than Rs 1 lakh crore as loans.