Indian banks' exposure to troubled telecom companies is not large enough to pose a systemic threat, but defaults could add to problems at banks with weak balance sheets, says Fitch Ratings.
Indian banks already have significant asset quality issues that could be made worse by stress in the telco sector. Total debt owed by telcos to banks is only INR 913 billion (USD14 billion), accounting for just 1.4% of all bank loans, according to the Reserve Bank of India. Whereas, lending to iron and steel companies, accounts for 4.7% of total lending. The power sector accounts for 8.7% and the road sector for 2.7%. Moreover, not all telcos face financial difficulties.
Some companies could find it difficult to service their debt and we have the sector on a negative outlook. Pressure is most severe at Reliance Communications (Rcom), which we downgraded last week to 'CCC' to reflect the real possibility of some kind of default.
RCOM’s EBITDA declined by 30% in the financial year to end-March 2017 and its earning are unlikely to be sufficient to cover interest costs and capex over the coming year. Liquidity was also poor, with cash and equivalents of INR14 billion (USD220 million) well short of covering short-term debt of INR109 billion. Rcom's total debt is around USD7 billion, a significant portion of which is owed to state-owned banks.
Telcos like Airtel Vodafone, Idea and even Tata Telecom backed by a strong parent are in a much better position. Bharti Airtel, is likely to meet repayments comfortably on the over USD1 billion that it owes to banks. Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share.
Meanwhile, the risk of Tata Telecom missing payments is mitigated by the potential for its parent company, the Tata Group, to inject equity into its subsidiary. State-owned telcos, BSNL and MTNL, are likely to be in weaker positions, but almost all their debt is owed to the government.
"Loans to telcos are also generally backed by spectrum assets, which should provide a better chance of recovery than, for example, a steel factory operating below capacity or a power plant that lacks a power purchase agreement," Fitch said.
But the sale of spectrum will take longer and may not fetch full value because the top-three telcos now have sufficient spectrum to run their operations for the medium term. |