The controversy over the 2008 allocation of second-generation (2G) licences and spectrum to five telcos and the spotlight on loans given by state-run banks to the telcos against these licences could, apart from increasing the risk of default should these licences be cancelled, also force lenders to become wary of lending to a sector which will need a lot of money in the next few months.

Also See Large Borrowings (PDF)

“Some of the companies will find it difficult to meet repayment commitments (if punished severely)," said Vikas Agarwal, senior vice-president at credit rating firm Icra Ltd.

According to Agarwal, telecom firms, including those affected by the controversy over the 2008 allotment of licence, will need around 50,000-60,000 crore over the next two years to fund expansion, which includes the rollout of 3G (third-generation) mobile services.

“Banks will be selective. They will only lend to companies which have strong balance sheets and meet eligibility criteria," he added.

Government-owned banks have loaned around 14,000 crore to five of the companies allocated 2G licences in the form of short-term, working capital loans and bank guarantees, according to documents reviewed by Mint.

This number couldn’t be independently verified because none of the banks was willing to speak about the loans.

Officials at these banks said they would consider legal recourse to ensure repayment if the licences given to telcos that have borrowed money from them are cancelled.

Many of the telcos issued licences in 2008 raised money against these licences through tri-partite agreements that also involved the lenders and the government. In case of cancellation, banks have the right to auction the licences.

The bank officials, who did not want to be identified given the controversy surrounding the 2G licences, added that any increase in the risk associated with their outstanding loans would turn them “extremely risk averse" and prevent them from lending to telcos in the future.

The department of telecommunications (DoT) has sent notices to five of the telcos 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—asking them whether they had bent the rules while applying for these licences.

The telecom minister who oversaw the allotment, A. Raja, has had to resign and his successor, Kapil Sibal seems intent on cleaning house.

A government official who did not want to be identified said one option being considered in cancelling the licences of the worst offenders, but most analysts Mint spoke to said this is unlikely because it would affect customers in the case of those telcos that have already launched services, and have an adverse impact on foreign investment in those cases where a foreign company is involved. For instance, Swan Telecom Ltd, sold a 45% stake to UAE’s Emirates Telecommunications Corp. or Etisalat and Unitech Wireless, a 67.25% stake to Norway’s Telenor ASA.

A possible compromise is for the telcos to pay more for the spectrum they received, said Archit Singhal, research analyst with Jaypee Capital Ltd.

Apart from the licence itself, some telcos pledged telecommunication equipment and transmission towers to raise loans. Among state-run banks, State Bank of India (SBI) and Punjab National Bank (PNB) have significant exposure to telcos issued licences in 2008.

An official at SBI, which has an exposure of about 10,000 crore to these telcos, said that while the amount is insignificant when “compared to the total book", it is still large. “There will be a kind of stoppage (of loan flow) to the sector, if the licences are cancelled. Lenders will be afraid," added this person, who was involved in the loan to the telcos and did not want to be identified.

An official at PNB, which has an exposure of 330 crore to telcos issued licences in 2008, said banks would look at what is “available (as security in the event of a default)." The official did not want to be identified

The SBI and PNB officials as well as an IDBI Bank Ltd official who did not want to be identified (the bank has an exposure of around 1,000 crore to these telcos), said banks may have no option but to go to court to recover their dues if the licences are cancelled.

Between 31 March 2007, and 27 March 2009, banks’ overall exposure to telcos more than doubled to 50,326 crore from 19,446 crore, according to rating agency Credit Analysis and Research Ltd.

Bankers say collaterals such as towers and real estate may not suffice in the event of a default.

“That (pledged assets other than licence rights) will not suffice for anything. Most of them use towers which are not their own," said a senior official with a state-owned bank. “The major part of their assets is created from the cash flow generated from operations. If it is not going to come, there is no doubt that it could definitely lead to a legal battle. But banks’ right to claim the rights on these licences will prevail."

The controversy over the 2008 issue of licences and spectrum had been brewing for some time, but really came to a head earlier in November when the government’s auditor, the Comptroller and Auditor General of India said in a report that the award at spectrum below market rates during this allotment, and previous allotments, may have caused the exchequer a notional loss of around 1.76 trillion. The Central Bureau of Investigation is currently investigating the matter.

Spokespersons for STel, Loop, and Etisalat DB said they would respond to DoT’s notice and reiterated that their companies were above board. Videocon didn’t respond to a query seeking comment.

Uninor said that its loans are “backed by a letter of comfort from the Telenor Group, which is the world’s sixth largest mobile operator and majority owned by the Norwegian government. Further, only 500 crore is the outstanding loan with the SBI, the remaining having already been repaid."