Telecom regulator should learn something from its banking counterpart. The Reserve Bank of India (RBI) has told the banks to be cautious to the declining health of telecom operators. “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 RBI to all the banks.
It has pointed out that the 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 operators are facing huge debt of about Rs. 4.2 lakh crore and a tariff war.
RBI has asked the banks to review the telecom sector latest by June 30. “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.
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.
Please read the following story for perspective:
Advantage Reliance Jio: Telecom Regulator’s recent decisions are against the spirit of TRAI Act