Mumbai: Wiser after their bad experience funding telecom company bids for second-generation (2G) licences in 2008, Indian banks plan to act with extreme caution while giving money for the forthcoming spectrum auction.
They will insist on stricter technical evaluations of projects. Some banks are even considering employing external agencies to assess the viability of projects, and loans will be given only to those firms where promoters have a clean track record, most bankers said.
“I don’t think we would like to lend to the telecom sector,” said the chairman of a state-run bank in south India. “We do not have appetite for it. Besides, banks would also like to wait for Reserve Bank of India’s (RBI’s) guidelines on spectrum pricing.”
Early this week, RBI deputy governor Anand Sinha said the central bank had laid down a few preconditions for the financing of telecom firms for 2G spectrum, to safeguard banks against potential defaults. The conditions are valuation-related, he said.
RBI deputy governor Anand Sinha said earlier the central bank had laid down a few preconditions for the financing of telecom firms for 2G spectrum, to safeguard banks against potential defaults. Photo: Hemant Mishra/Mint
Last week, the Union cabinet set the reserve price for the auction of 2G telecom spectrum at Rs 14,000 crore for a slot of 5 megahertz across the country, more than seven times at which the cancelled spectrum was awarded in 2008.
Indian banks plan to act with extreme caution while lending money to telecom firms for the forthcoming spectrum auction
Telcos have raised concerns against the pricing, but the government, faced with the challenges of a slowing economy, a rain-deficient monsoon and the widening fiscal deficit, wants to mop up as much money as it can.
“We are clear. Only those companies which are absolutely creditworthy will be given loans,” said Pratip Chaudhuri, chairman of India’s largest lender, State Bank of India (SBI).
“Viability of the project is the key,” said a senior official with a Mumbai-based state-run bank. “There will be a proper evaluation linked to the tariff, to decide whether a company can succeed in the market.”
Smaller firms, already reeling under financial stress, may find it tough to convince their lenders, bankers said. Though the new rules allow banks to sell the spectrum to recover dues, this may not give too much comfort to the lenders.
Typically, banks lend to telecom companies at an interest rate of 13-15% with the maturity depending on the project. Funds are released in a phased manner, in accordance with the progress of a service roll-out.
State-owned banks had given at least Rs 14,000 crore to five companies that were allocated 2G licences in 2008 in the form of short-term, working capital loans and bank guarantees. Few of the firms have since then paid back the money.
The Supreme Court on 2 February cancelled 122 telecom licences and 2G spectrum allocated in 2008, as the allotment process was flawed. It ordered the government to auction the spectrum by 2 June. The deadline was later extended to 31 August, with the affected companies given time till 7 September to wind up their operations. The government on Thursday moved a writ petition in the Supreme Court seeking an extension to the 31 August deadline to conclude the auction of 2G spectrum.
“Telecom companies cannot arrange to raise more debt unless they pledge spectrum. Banks also will want more collateral, and the call is on banks on what collateral they want and how they work on the modalities,” said Kajal Gandhi, analyst at ICICIdirect.com, the retail broking arm of ICICI Securities Ltd.
As of 18 May, Indian banks’ outstanding exposure to the telecom sector was Rs 97,650 crore. In the past one year, virtually no fresh loans have been given.
As of 31 March, SBI had a Rs 24,296 crore exposure to telecom companies, Canara Bank had Rs 7,297 crore and Bank of Baroda’s exposure was Rs 5,824.38 crore, according to annual reports.
“The whole problem of telecom companies can be resolved if tariffs can be raised. Without that, what is the viability plan, particularly of small players who come into the space without any proper commitment and sell stakes subsequently?” said a senior executive at a mid-size government-owned bank, which has exposure to some of the telecom companies. “I don’t think these players have any chance of getting funding this time.”
S. Raman, chairman of Canara Bank, said his bank will exercise caution on lending to telcos. “There is no question of not touching any company, but we will exercise more caution this time. There are issues surrounding the low tariff plan and whether the heavy investment can be recovered, etc.,” he said.
R.K. Bakshi, executive director of Bank of Baroda, said the new aspirants still need to gain critical mass and the stiff competition is making break-even delayed and difficult.
“We will have to consider individual balance sheets, strength of promoters and business plan, and viability. The good aspect is that there is more clarity about pledging of spectrum as security,” Bakshi said.
Abbas Merchant, vice-president (research) at Jaypee Capital Services Ltd, said there is no clarity on banks being at liberty to sell spectrum in case of default.