Bankers exude mixed reaction to 2G verdict's impact

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Following the Supreme Court verdict on the cancellation of 122 2G spectrum licences granted by former telecom minister A Raja, the Finance Ministry is working out the financial implication on the banking sector.

Imposing a fine of Rs 5 crore each on three telecom companies which offloaded their shares after getting the licenses, the apex court directed regulator Telecom Regulatory Authority of India to make fresh recommendations on allocation of 2G licences.

According to Ananda Bhoumik of Fitch Ratings, the potential exposure to 2G is actually between 20-25% of the total exposure that banks have to the telecom sector. Furthermore, Bhoumik added that some of these players also have other sources of funds, including 3G, so it is not clear what the provisioning or the losses could be. But at the aggregate, it doesn't seem to be in itself a cause for alarm.

RK Bakshi, ED, Bank Of Baroda said that his bank will not have to take any major hits as far as financial exposure to the sector is concerned. "The reason why we seem to be relaxed at this point is because the overall quantum, even if you assume certain harsh write-off assumptions, those would not impair the bank's credit. But I don't think it is wise to assume at this point that all exposures are hunky-dory and they may not slip."

BK Batra, Executive Director & Group Head - Corporate Banking, IDBI Bank revealed that the bank has a total exposure of around Rs 11,000 crore to the sector. He added that it is a combination of fund based and non-fund based exposure. But as far as the directly attributable to 2G services is concerned in relation to the licenses, which have been cancelled, it is around Rs 800 crore.

Below is the edited transcript of the discussion. Also watch the accompanying videos

Q: Several bankers and even RBI sources have said that they probably expect that the money given for license fees to be returned because the licenses are getting cancelled and rebid. But there is a big group of opinion of people who believe that the money will not be returned, which is penalizing people for participating in the process. Have you been able to get any clarification on the matter?

Bakshi: I don't think we are anymore wiser in this matter. We stand where we are. So, in such a situation, we have to bank on more clarity to emerge on how the process goes forward and the rebid process as well as other securities that the bank may have or depending on the credentials of the people behind the project.

Q: Have you done any initial number crunching? Do you expect this to be a significant hit or do you think that people will rebid and it will be business as usual for most of the parties?

Bhoumik: We have taken an assessment and it is in line with the feedback we are receiving now from various banks, which at the aggregate, is actually small. The potential exposure to 2G is actually between 20-25% of the total exposure that banks have to the telecom sector. Therefore, this was indeed a relatively small piece. Some of these players also have other sources of funds, including 3G, so it is not clear what the provisioning or the losses could be. It is an outcome of how the affected parties decide to react, whether they will stop business and aggressively litigate or whether they just go along and rebid. But at the aggregate, it doesn't seem to be in itself a cause for alarm.

Q: There is still a question mark whether they will be refunded the initial license payment. With the assumption that it is not given back, would it worry you and warrant a case of de-rating for any of the banks?

Bhoumik: Any loss arising out of the fact that the parties may litigate is something that will only emerge. I don't think we can speculate, we are assuming even in a stressed case, even if the banks have to write off part of the principle, I don't think, on itself, this is going to cause us to be de-rated.  Assuming that, even if banks lose 40-50% of their exposure, I don't think in itself it is going to affect credit profile per se.

Q: What is your own exposure - what are the fund and non-fund exposures and do you think any of them look wobbly?

Batra: We have a total exposure of around Rs  11000 crore to the sector. It is a combination of fund based and non-fund based exposure, but as far as the directly attributable to 2G services is concerned, in relation to the licenses which have been cancelled; it is just around Rs 800 crore. Again, it is a total of fund based and non-fund based exposure.

Q: Would you give the breakup between fund and non-fund in the Rs 800 crore for the 2G licenses?

Batra: May be around Rs 500 crore is fund based and around Rs 300 is non-fund based.

Q: In the last 24 hours, you may have done your homework on how things may pan out for your various borrowers. What is the sense you are getting? Other than Idea and Tata Tele, which obviously have a huge business going and which will be able to honour their loans anyway, with the other people do you worry that the loans will not be lent? Because of this do you expect that there could be a rise in NPLs or restructured loans in this quarter or the next?

Bakshi: I would not have referred the names, but you have. On a broader picture out of the names that have been - for whom licenses have been cancelled, out of those entities we have an exposure to some of those telecom companies which include the names that you mentioned and the total exposure on that is less than Rs 600 crore.

The exposure to those entities which have got licenses only in the 2008 process amounts to around Rs 150 crore. That is the only exposure to such entities which have got licenses only post the 2008 process. All other exposures have a much wider holding of licenses and spread of services.

Q: In this segment of Rs 150 crore, have you got back to promoters or made your own internal assessment on whether people are likely to carry on business or do you think this Rs 150 crore could be a troubled amount?

Bakshi: Everybody is trying to take stock of the situation. The promoters are people who enter the business for doing business and I don't think immediate response is to opt out of business but then it depends a lot on how the re-bidding process and others go on.

We do not really feel that we will have to take any major hits vis-à-vis our financial exposure to the sector is concerned because those licenses maybe new. People are perhaps financially alright and there should not be any issue. Of course for every group, once you lose a valuable asset, you come under some sort of a stress.

Q: There is a possibility of further auctioning taking place of the ones which will get freed up. Do you think the banks are going to be a little cautious or unwilling to lend as aggressively as they did to the telecom sector in the previous auctions?

Batra: As far as IDBI Bank is concerned, let me clarify that among the new players who came into this sector in 2008, we actually supported only one player that was Estel Limited. This is a company which was set up by Mr. C. Sivasankaran who had the prior experience of having promoted and set up Aircel Limited. He had teamed up with the Bahrain government telecom company. So with those credentials, we assisted and none of the others at that point of time we took a call to assist. Therefore, our exposure happens to be very limited and we don't think there is too much of an issue about it.

Q: It was good to hear that you are not terribly concerned about the exposure and that in your own analysis this will not add to the bad loans. You believe that most of them are supported by big corporates, for instance Sistema or Telenor - is that what gives you the confidence; what makes you feel a little relaxed about this exposure?

Bhoumik: We are not relaxed because we don't think they could slip; they could slip and collaterals may be difficult to realize especially if there is litigation. The reason why we seem to be relaxed at this point is because the overall quantum, even if you assume certain harsh write off assumptions, those would not impair banks credit. But I don't think it is wise to assume at this point that all exposures are hunky-dory and they may not slip. As I said, it all depends upon the attitude and the approach that the affected parties take and how they go about resolving it.

Q: Which bank would you keep on your watch list or radar as one where potential problems may crop up on account of this news?

Bhowmik: I think of the ones that we currently rate is mostly the large government banks and their ability to absorb this. However, the big picture that emerges is that banks, especially government banks, risk and the exposure to the infrastructure have risen and we have pointed this out several times. I think what we are seeing is increasing sorts of risk that is coming up.

Regulatory risk was always known as a key act in the telecom sector but what we are now seeing is not incremental risk. We are seeing risk that is effectively switching on-switching off. That I don't think has any precedence. So I would be cautious now. We already are cautious and we are even more cautious if banks started to increase their share of infrastructure lending. I think banks credit profile is finally balanced now. It could just tip if they continue to decide to increase their proportion share.

Q: The total exposure to the telecom space is 20-25% for the 2G licensees. What is the total exposure and to the vulnerable 2G parties , how much is it in terms of rupees?

Bhoumik: I wouldn't have that in rupees, but it should be around 0.6% of total loans of the banking sector.