The Reserve Bank of India (RBI) has raised a red flag over banks’ loans to telecom players and asked the lenders to increase their standard asset provisioning more than what is prescribed so that they can built ‘necessary resilience.’
“The telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one,” according to a circular issued by the central bank to the lenders.
Interest coverage ratio of less than one means the company’s EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortization) is not sufficient to repay interest, let alone principal.
Telecom players are reeling under a huge debt — estimated to be about ₹4.2 lakh crore — amid a tariff war and a consolidation among some of the players.
Asking the bank boards to review the telecom sector latest by June 30, the central bank said: “Consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date.’
Banks have to make 0.4% provision for standard advances.
Jaideep Ghosh, partner, telecom at consulting firm KPMG said: “Debt accumulation and potential NPAs have been on the rise across a range of sectors including telecom. Alarming debt levels in the backdrop of recent declining revenues increase debt serviceability risks for the telecom sector.”
Banks have also been asked to closely monitor their exposure to the sector.
RBI governor Urjit Patel had earlier said five sectors, including telecom, contributed to 61% of the stress in the banking system.
While the industry’s market cap is shrinking, the return on capital deployed has dipped to low single-digit return in markets like India, making it unviable.
Airtel chairman Sunil Bharti Mittal, in a recent interview to The Hindu , had said, “We may as well keep our money in the bank and go out to play golf,” adding that return on investment has been falling sharply.
Banks are reeling under asset quality pressure amid sluggish economic growth as their gross non-performing asset rate rose to 9.1% in September 2016, from 5.1% a year ago.
RBI has also asked banks to increase standard asset provision in other stressed sectors.
Banks have been asked to put in place a board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on the evaluation of risk and stress in various sectors.
“The stress is a result of a couple of things such as debt position of the industry, hit on the revenue in the last several months and increasing overall cost,” Rajan Mathews, Director General, COAI told The Hindu .
“And because of the competitive nature of the industry, we have not been able to pass the costs to the consumers. As a result, the margins of the industry have slipped considerably,” he said.
“At the time when RBI is talking about increasing NPAs ...this should send a clear signal to the government to urgently address the financial condition of the telecom industry.
“The recommendations from TRAI such as reducing SUC (spectrum usage charges) fees to 1%, reducing licence fee payment to 3% and adopting revised definition of adjusted gross revenue… these are 3 big ones. They would really provide financial oxygen to the industry and help them tide over this very stressed period,” he said.