Showing posts from June, 2012

What if PA becomes NPA

Even this is about Power sector in India.
Let's say CompanyXYZ intends to setup power plant. Total Project Cost is Rs1,000 Cr. They managed Rs300 cr and they got a debt of Rs 700 cr since they got all the clearances including Coal Linkage, PPA, EC etc.They went ahead and placed the BTG order and BoP order.Activity worth ~Rs 500 cr is executed.
Suddenly one day the Coal Linkage is cancelled. And due to forex fluctuations the BTG cost increased by 20% leading to an overall cost increase of 15% for the project. Since the RoE from a power plant in itself is around 15%, the plant is no longer viable.  Now a Performing Asset (PA) has become an NPA. Now what are the options for lender? While Technically NPA happens only after a default, for the sake of discussion let's assume that any project which is no longer happening is an NPA. If the borrower is a Govt. entity, every lender has the support and cushion that Govt. body will pay back. But what if the borrower is a private entity.  Moreo…