RBI sees trouble ahead in loans to telcos, asks banks to raise provisions

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With the financials of telecom companies deteriorating, the Reserve Bank of India (RBI) on Tuesday raised a red flag over bank loans to the telecom sector and asked lenders to make higher provisions even if the accounts are standard.

The central bank noted that the telecom sector is reporting stressed financial conditions and the present interest coverage ratio for the sector is less than one. The RBI asked bank boards to review their exposure to the telecom sector latest by June 30. Banks have also been asked to closely monitor their exposure to the sector.

Most analysts have a negative outlook on the telecom sector as competition is likely to remain intense and consolidation is not likely to return any pricing power to operators in the near term. The entry of Reliance Jio, a subsidiary of Reliance Industries, has accelerated consolidation. The ongoing consolidation is likely to leave four larger operators -- Bharti, Jio, the combination of Vodafone India and Idea, and the combined Rcom and Aircel, Fitch Ratings had said in a report.

In the December 2016 edition of its Financial Stability Report, the RBI had noted that telecom is among the three most indebted sectors along with iron and steel and power. According to a September 2016 report by industry body Assocham and consulting firm KPMG, companies in the telecom sector have an accumulated debt of Rs 3.8 lakh crore.

At present, the mandated provisioning against standard assets is set at between 0.25 per cent and 1 per cent for different sectors. The provisioning rises if a company fails to service the interest on its loans within 91 days. The central bank did not specify the quantum of additional provisioning that the lenders should make but said that it should be sector-specific and should be reviewed at least once every quarter.

While reviewing the sector, the banks should review quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/regulatory issues faced by the sector, etc.

The RBI said the provisioning rates prescribed are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy.

In another circular, the RBI said it has noted instances of material divergences in banks’ asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank. In order to ensure greater transparency and promote better discipline, it has been decided that banks shall make suitable disclosures.

Telecom industry body COAI said, “We are glad that RBI has taken note of our contention that the industry is in financial stress. We had warned continuously that companies are hard pressed to make payments to the government and the banks.”

Cellular Operators Association of India (COAI) director general Rajan Mathews also asked the Telecom Department to consider recommendations of the Telecom Regulatory Authority of India (Trai) on lower spectrum and licence fee charges.

Last month, Trai hit back at Telecom Commission’s contention of free offers playing havoc on finances of telecom companies saying its policies are aimed at promoting competition and lower tariffs that benefit consumers.

(With inputs from PTI)

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