Banks wary of lending to telecom firms over presidential reference on licences since 94

Written by Rishi Raj | New Delhi | Updated: Apr 17 2012, 09:02am hrs
Fresh uncertainty has gripped the telecom sector after the presidential reference to the Supreme Court last week effectively brought under review the legality of mobile licences allotted since 1994. Until the constitutional bench decides the matter, which could take up to two years, there would be uncertainty with regard to further funding of telcos serving 800 million of Indias 900-million cellphone users, besides damping sentiments on 4G auctions scheduled for December. Bankers would be wary of funding telcos that have got dragged into fresh legal issues by virtue of the presidential reference.

Not surprisingly, bankers are taking a dim view of the one-time sunshine sector. Between them, Bharti Airtel, Reliance Communications, Vodafone, Idea, Aircel and Tata Teleservices serve 700 million users while state-owned BSNL and MTNL serve 100 million.

After the Supreme Court termed the first-come-first-served policy illegal and cancelled 122 licences, the government made a presidential reference on the legality of basic service licences granted in 1994 and 2003-07, since there were no auctions in these cases either. The government wants to know if it should withdraw spectrum if found illegal, or whether it should charge the price discovered through an auction. It also wants to know if 35 dual technology licences granted to RCom, Tata Tele, Shyam and HFCL in 2007-08 were illegal.

Analysts and bankers told FE that until the SC gives its views, the sector would be at a standstill. There will be virtually no bank loans to fund expansion of networks. If at all any of these firms spot a good overseas acquisition, getting finance would be difficult and no foreign firms would look at picking any stake in any of these firms, said an official from a leading bank.

Another banker said the reference could lead to a negative bias in lending. We have a very small exposure to the telecom sector. But we will be patient and adopt a wait-and-watch approach before taking a call on lending to the sector, the official added.

Corporate lawyer Diljeet Titus of Titus & Associates agreed, adding in such a scenario, the rising cost of doing business would affect consumers. It's a done thing that banks and other such institutions would refrain from lending to the companies till the SC gives its views. Companies would be left with no other choice but to look at other methods of raising funds for which chartered accountants and lawyers would work out the modalities. The result would be that the cost of doing business would increase and ultimately consumers would suffer, Titus said.

Some bankers offered a more nuanced approach. We are not worried about the Presidential reference and will continue lending to the sector if we are convinced that the borrower's business model is strong. Even if there are cancellations of telecom licences going forward, new licences will be auctioned as there are consumers who need to be serviced. Thus, we do not expect to see a slowdown in growth in the sector. We currently have an exposure to two top telecom players, said SL Bansal, CMD of Oriental Bank of Commerce.

Echoing a somewhat similar view, MD Mallya, CMD, Bank of Baroda, said: We are yet to study the entire situation from the reference document on 2G spectrum allocation of telecom companies; however, we have little exposure to telecom. Those who we have lent to have their licences in different circles.