Telecom sector bank loans set for further stress

The cancellation of 2G auctions and reallocation of 3G waves, all funded through bank loans, created stress on the balance-sheets of telecom companies. The entry of Reliance Jio, with free services that poached customers from other service providers, is likely to create further stress.

Banks have a loan exposure of Rs 82,200 crore to the telecom sector, say bankers and analysts.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, told DNA Money, "The cancellation of 2G auctions and reallocation of 3G auctions were funded through bank loans which had begun to cause stress. The launch of Reliance Jio has further caused disruption in the sector. But Reserve Bank of India's call for additional provisioning is a reiteration of their earlier stand to complete all provisioning by 2017."

A senior public sector banker said, "Expecting competitors also to under-cut prices and push themselves into loss may have prompted RBI to suggest for additional provisioning with special reference to the telecom sector."

RBI on Tuesday had asked banks to review immediately exposure to the telecom sector and make higher provisions to firewall their business against any future stress.

As on February 2017 the banking sector had a total funded exposure of Rs 82,200 crore to the telecom sector. According to an analysis done by HDFC Securities, IndusInd Bank accounts for 4.7% of the total banking sector exposure, followed by Kotak Mahindra Bank, which has 3.7% exposure to the sector. Axis Bank accounts for 2.56% of the total exposure to the sector.

A senior banker with Kotak Mahindra Bank said, "All our exposure is standard to the sector. The RBI advisory is more of a precaution for any future potential stress."

Darpin Shah, analyst with HDFC Securities, said, "On an immediate basis, RBI has asked banks to review the exposure in the telecom sector."

Karthik Srinivasan, group head, financial sector ratings, Icra, said in a note, "Based on the revised PCA (prompt corrective action) framework, a total of 16 PSBs out of 21 (excluding SBI associates) and two out of 16 private banks will require taking mandatory corrective actions such as raising capital levels, restricting the dividend payments, branch expansions or face restrictions on management compensation to come out of the PCA framework."

Banks now have to put in place a board-approved policy for making higher standard asset provisions based on evaluation of risk and stress in various sectors. The bank board is required to review the provisioning policy at least on a quarterly basis. On immediate basis RBI has directed banks to review the telecom sector by June 17 and consider making higher provisions.

Under current rules, most standard assets attract a provision of 0.4%. The few exceptions include credit to commercial real estate — which has a 1% provision — and residential real estate (0.75%). However, the regulator hasn't specified the extent of higher provisioning for good loans to telecom or other stressed sectors.