Feb 12 circular: RBI refuses to be merciful towards the battered power sector

Various power companies had last year moved the Supreme Court, challenging the constitutional validity of the Central bank's February 12 circular

Mumbai: Lenders will possibly need to make higher provisions on loans given to the power sector for the quarter ending March. The Reserve Bank of India (RBI) said that it has not changed its stance regarding the February 12 circular even though it has been challenged in the Supreme Court. Various power companies had last year moved the court, challenging the constitutional validity of the Central bank's circular. 

Govt has right to issue directions, says RBI

The RBI circular needed banks to proceed against all defaulters owing over Rs 2,000 crore if no solution to their default was in sight for six months. The matter had moved from the Allahabad High Court to the SC where the Central bank had stood by its stand, saying the government had the powers to issue directions to the RBI if it did not accept.

Apart from asking lenders to initiate recovery proceedings against large defaulters within half a year, the circular removed all old restructuring schemes. As a result, provisions will have to be made by banks. An asset would be classified as 'doubtful' if it stays in the 'sub-standard' category for 12 months, according to RBI rules. Any loan that has been non-performing for 12 months is seen as sub-standard.

Lenders will need to make 100 percent provisions to the extent that the loan is not covered by the realisable value of the security for doubtful assets. There is neither a power purchase agreement nor fuel supply in many of the power projects, leaving the assets with little realisable value.