EXCLUSIVE: Cabinet Secretary looking into troubles of telecom sector, risks to banks

In a reflection of how seriously the government views the travails of the telecom industry and the risk its Rs 4.4 lakh crore debt poses to the banking system, it has asked its top bureaucrat to look into the problems faced by the sector.

Cabinet secretary Pradeep Kumar Sinha has in turn asked state-run investment bank SBI Caps to assess and apprise him of the financial health of the telecom companies. The bank made a presentation to him last week. The idea of asking SBI Caps was to get a third party view of the matter, given that the Department of Telecom had already raised concerns on the sector’s condition.

According to sources close to the matter, the presentation highlighted some of the key issues facing the industry and the risk to its lenders. When contacted by Moneycontrol, Varsha Purandare, Chief Executive Officer and Managing Director of SBI Capital Markets declined to comment on the matter.

According to the sources, the presentation highlighted the sector’s debt and the fact that it had deferred spectrum liabilities of a further Rs 3.74 lakh crore. The big three players (Airtel, Idea and Vodafone) account for Rs 2 lakh crore of the bank debt.

However, the danger signals are coming from the smaller marginal players, who are unable to sustain revenues in the face of competitive intensity. In FY16, the industry’s revenues grew by 6.5 percent even as its subscriber base grew by 79 million. But this year, the industry’s revenues are slated to contract owing to competition and demonetisation.

Smaller players are even finding it hard to make payments to vendors and tower infrastructure companies.

Some of the weaker operators made several appeals to the finance ministry last week and sought stressed sector status for the industry, as the telecom industry’s debt is higher than that of the steel and power sectors. Stressed sector status would allow it to get its debt repayment spread out over a longer period of time.

However, sources said, the government was unlikely to go this far, given that the bigger players are profitable at this point.

Cellular Operators Association of India chief, Rajan Mathews, had asked the government to stop charging licence and spectrum usage charges as it is already taking money up front through spectrum auction charges.

Over the last two years, the industry’s debt has nearly doubled, thanks to two big spectrum auctions. Industry representations have conveyed to the government that spectrum cost is highest in India and despite that, they are still having to pay a percentage of revenues and spectrum usage charge to the government.

It was conveyed that the industry needs to pay Rs 28,000 crore a year to the Department of Telecommunications as deferred spectrum payments and another Rs 45,000 crore is needed to service debt.

The industry’s operating income has to be higher than this figure of Rs 73,000 crore to keep its head above water. Given the recent fall in revenues, the industry believes that there will be a gap and that their cashflows may not be sufficient to meet liabilities.

There are also fears that the distress in the sector may reach the bigger players at some point.