The controversy over the allocation of second-generation (2G) spectrum to telecom companies and the increased scrutiny on loans given by state-run banks for the licences tied to this has dented the confidence of lenders.
State Bank of India (SBI), the largest lender in the country in terms of assets, has tightened rules for new loans to telecom companies.
It has also decided to extend only project-based loans to telecom firms, which could push up their cost of borrowing from the bank.
SBI, which gave Rs 14,000 crore in loans to winners of 2G licences in 2008, has made it mandatory for telecom companies to submit a utilization plan, a repayment schedule and details of their service rollout.
There will be increased scrutiny to decide the eligibility of companies seeking funds.
SBI will “be extra careful now to lend to the (telecom) sector, especially to those firms” that got licences in 2008, said Hemant Contractor, deputy managing director and chief financial officer.
“We will take a closer look at each proposal and their compliance with the norms, service rollout plans, and will assess their repayment capacity,” said Contractor, one of the contenders to succeed O.P. Bhatt as SBI chairman.
This may make it difficult for new telecom companies without strong balance sheets to get loans.
“Banks will be cautious to lend to newer players as many of them are making losses and have a weak topline. Their margins are less as compared to larger players. Growth is also less visible as compared with the larger players,” said Archit Singhal, a research analyst with Jaypee Capital Services Ltd.
The department of telecommunications (DoT) has sent notices to five firms that received licences in 2008—STel Pvt. Ltd, Swan Telecom (now Etisalat DB Telecom India Pvt. Ltd), Unitech Wireless Ltd (known by the brand name Uninor), Videocon and Loop Telecom Pvt. Ltd—seeking their response on the matter.
The companies that got loans from SBI in 2008 include Uninor, Videocon and Loop Telecom. SBI’s exposure to these companies totals Rs 5,000 crore of bank guarantees and the remaining Rs 9,000 crore are in the form of corporate loans, working capital and term loans.
“These loans are fully secured. There are no issues unless the licences are cancelled. In that case, we will be taking up the issue with the government and the individual borrowers,” Contractor said.
SBI has also decided to stick to project-based funding while extending new loans to telcos, including funding for the rollout of 3G (third-generation) services, to make sure that the money is used only for the stated purpose, Contractor said.
Banks, including SBI, have traditionally offered short-term corporate loans to telecom companies, but many have stopped such funding. This is to get a fix on the end-use of such loans as companies often divert funds from the originally stated purpose.
Project-based funding could mean a rise in the cost of bank loans for telcos.
Typically, banks give corporate loans at 11-12% for terms ranging from three months to one year. Project-based loans cost 12-14% and the terms of such loans vary, depending on how long a project takes.
Companies opt for short-term corporate loans at the start of a project to fund their initial expenditure and later replace those with long-term finance.
Analysts estimate that India’s telecom sector will need Rs 50,000-60,000 crore over the next two years to fund expansion, which would include the rollout of 3G services.
Getting dragged into controversies such as the 2G spectrum allocation will make banks risk averse, several executives told Mint last week. The executives, who spoke on condition of anonymity, were from lenders such as Punjab National Bank, IDBI Bank Ltd and Union Bank of India.
The overall exposure of banks to the telecom sector more than doubled to Rs 50,326 crore from Rs 19,446 crore between 31 March 2007 and 27 March 2009, rating agency Credit Analysis and Research Ltd said.