Global ratings agency Fitch today said the Supreme Court's decision to cancel 122 telecom licences will hit the profitability of banks that had extended credit to these companies by up to 10%.
"Assuming a conservative level of write-offs on these loans, we believe that banks' credit quality will not be materially weakened, but that annual profits could fall by up to 10%," it said in a report.
According to Fitch, Indian banks' exposure to the telecom companies that are losing 2G licences is around 0.6% of their total loans.
"However, around half of the exposure is in the form of financial guarantees toward future payments of licence fees. State Bank of India has confirmed that once the licences are cancelled, those guarantees should no longer be in force," it said.
"In total... the volume of loans that are affected by the licence cancellations may be less than 0.2% of the sector's total loan book," Fitch added.
In a report, the agency added that the banking sector should be able to absorb loan-losses on account of the cancellation of licences without it having a major effect on their credit profile.
"The Indian banking sector should be able to absorb loan-losses stemming from the cancellation of second-generation mobile licences without materially impairing credit quality, though Fitch Ratings believes annual profits will still take a hit," it further said.
According to the agency, while the impact of the Supreme Court's decision is limited, the cancellation of the 2G licences highlights the Indian banks' exposure to infrastructure, a sector which continues to face high regulatory and execution risks.
"We have previously highlighted that banks' ability to handle these exposures as a whole is finely balanced and further increases in exposure to the infrastructure sector may hurt the standalone credit profile of Indian banks," it said.
Fitch's report comes on a day when government said that public sector banks have an exposure of about Rs 10,000 crore to telecom companies whose licences were cancelled.
"The public sector banks have an outstanding loan of Rs10,000 crore... of which Rs7,500 crore is secured (against assets)," a senior Finance Ministry official said.
The apex court yesterday cancelled 122 2G spectrum licences granted by former Telecom Minister A Raja on the ground that they were issued in a "totally arbitrary and unconstitutional" manner.
It had also imposed a fine of Rs5 crore each on three telecom companies that offloaded their shares after getting licences and directed regulator Telecom Regulatory Authority of India (TRAI) to make fresh recommendations on allocation of 2G licences.
As far as individual lenders are concerned, State Bank of India said it had total exposure of Rs4,500 crore in these telecom companies.
The other lenders, including Punjab National Bank, Corporation Bank and Oriental Bank of Commerce, too, have exposure to these telecom companies.
"While the future of smaller telecom operators in India remains uncertain, we note that some of the operators that have lost licences also have other fairly significant operations that are not affected by the ruling, which may provide some respite to their creditors," the Fitch report said.
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