|Using PSUs to help PSBs|
|Wednesday, 26 October 2016 05:51|
Caution needed to ensure PSUs don’t get bad assets
On the face of things, finance minister Arun Jaitley asking PSUs to explore the possibility of taking over stressed assets of public sector banks (PSBs) is a good idea. Even assuming banks are able to get rid of defaulting promoters – this is a big assumption, though – and can take control of the assets, selling them requires a big haircut and, given the existing CVC/CBI/CAG system, bankers are naturally scared to take this call; also, assuming that bankers are willing to take this call, what do they do if there is no immediate buyer since the asset will just go to seed. A public-sector-topublic-sector sale, on the other hand, does not run this risk since an SBI will be able to convince the CBI that a 40% haircut on a power plant sold to NTPC cannot possibly be an act of corruption. As for NTPC, it will be able to get a power plant much cheaper than if it had to construct it from scratch on its own, and there will be no cost/time delays on account of issues like not getting land or other clearances.
It is, however, important to be cautious here. For one, any takeover of a stressed asset has to be a call the PSU takes, it cannot be taken by even the line ministries – at the meeting with the FM, various secretaries of different ministries like power and steel were present, suggesting they could have a proactive role in the proposed sales. Two, these decisions, including on the price of the asset, have to depend upon the absorptive capacity of the PSU. If NTPC cannot buy more than one 500MW plant in a year, it cannot be asked to buy two. In the power sector, for instance, the biggest problem is the very poor growth in demand and, in this context, the large oversupply of projects – that explains why such a large number of power projects don’t have long-term buyers and power purchase agreements (PPAs). In a situation where state electricity boards (SEBs) are too bankrupt to buy additional power at the pace at which power plants are coming up, NTPC’s board has to decide whether it even makes sense to buy more than a certain number of plants – if a power plant requires a tariff of Rs 3 to break-even but the SEBs are willing to pay only Rs 2.5 per unit, buying the plant only means the PSB’s stress is being passed on to the PSU. It also needs to be kept in mind that such a strategy can only work in a few sectors, even with the caveats mentioned. In the steel sector – SAIL has been mentioned as a possible buyer of stressed assets – the move could prove disastrous given the fact that, with global prices so low, the minimum import price or anti-dumping duty is what is keeping steel firms afloat; adding more steel plants to SAIL’s kitty, even if at a discounted price, could make SAIL sick. Getting a SAIL to run a steel plant for a bank, for a management fee, though, is an eminently good idea.