Vodafone Idea - Telecom Future Uncertain

There seems no end to pain for the Banking sector in India which is already froth with tight liquidity conditions, poor corporate loan demand amid trust deficit by the Reserve Bank of India which wants to keep a tight vigil over bank operations.

The Private sector and PSU Banks are now bracing for the additional stress on their exposure to telecom services providers following the Supreme Court’s ruling on Thursday that the existing definition of adjusted gross revenue (AGR) will prevail.

The issue had been dragging for the past 14 years with the telecom services providers and DoT locked in a battle over the definition of AGR.

AGR assumes significance because it is the basis on which the DoT calculates levies payable by operators. Telecom services providers pay 3-5% and 8% of the AGR as spectrum usage charges and licence fees, respectively, to the DoT.

The verdict has put pressure on the telecom companies’ debt repayment capacity, leading to a higher risk of defaults.

Currently, Bank’s exposure to telecom services providers stands at a whopping Rs 1.50 lakh crore./

The telecom services sector, already burdened with debts, is finding it difficult to raise further funds to service debts. With promoters remaining reluctant to infuse funds, banks now fear to see an increase in default rates.

Already, Anil Ambani owned Reliance Communications has been referred to the bankruptcy court. It is expected that Vodafone Idea will also follow the suit after the promoter group expressed their inability to infuse more funds in the operations./

Also, media reports suggest that Aditya Birla Group will not infuse fresh equity into its venture with Vodafone and let it opt for insolvency if the government does not provide substantial relief.

What does this newsflow mean for the Banking Sector?

The bigger issue now facing the PSU and Private sector banks is that in the event of any failure to revive the Vodafone India business it would spell further trouble for banks like State Bank of India, Axis Bank, Union Bank, Bank of Baroda, IndusInd, Kotak, RBL, Federal, Canara, PNB. Yes Bank and HDFC Bank which collectively have a large exposure to the telecom sector totaling around Rs 150000 crs.

While all these loans have been backed by collaterals, it is the quality of collaterals which is more important going ahead.

Hence in the coming few weeks we may see volatile activity in all banking counters until further clarity is not given from Vodafone India’s side.