Ratings agency Fitch said on Tuesday that even though the exposure of Indian banks in troubled telecom operators is not large, but defaults at these firms can add to the woes of banks with weak balance sheets. Indian banks already have significant asset quality issues that could become worse by stress in the telecom sector, it has warned. However, total debt owed by telcos to banks is only Rs 91,300 crore ($14 billion), accounting for just 1.4% of all bank loans, according to the Reserve Bank of India (RBI),” Fitch said. Exposure to other troubled sectors is much larger. 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%, it added. The agency said that some operators can find it difficult to service their debt. “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,” Fitch said adding that debt servicing could also be at a problem at Aircel and Tata Telecomunications. On Aircel, Fitch said the firm is in the process of merging its wireless operations with RCom, but the combined entity will have limited pricing power and high leverage that will constrain its ability to strengthen its network position. In the case of Tata Telecommunications, the risk of operator to miss payments is mitigated due to the potential for its parent – Tata Group – to inject equity into its subsidiary. it added. Besides, the state-owned telecom operators, BSNL and MTNL, are likely to be in weaker positions, but almost all their debt is owed to the government.
Fitch noted that not all the operators are facing financial difficulties. The country’s largest operator, Bharti Airtel, is likely to meet its repayments comfortably on the over $1 billion it owes to banks. Vodafone India and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share. Also Idea’s balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt, the ratings agency added.
Although, loans to telecom firms are generally backed by spectrum assets that can provide a better chance of recovery, however the sale of such assets can take longer than expected as well as not fetch the full value as the top-three operators have sufficient spectrum to run their operations for the medium term, Fitch said.