The Indian banking sector should be able to absorb loan-losses stemming from the cancellation of the second-generation mobile licences, though annual profits will still take a hit, said global credit rating agency Fitch.
Assuming a conservative level of write-offs on these loans, the agency is of the view that banks' credit quality will not be materially weakened, but annual profits could fall by up to 10 per cent.
Limited impact
While the impact is limited, the cancellation of the 2G licences highlights the Indian banking sector's exposure to infrastructure — a sector that continues to face high regulatory and execution risks, said a Fitch statement.
Indian banks' exposure to the telecom companies that are losing 2G licences is around 0.6 per cent of total loans. However, around half of the exposure is in the form of financial guarantees towards future payments of licence fees.
State Bank of India has confirmed that, once the licences are cancelled, those guarantees should no longer be in force, Fitch said.
While the future of smaller telecom operators in India remains uncertain, the agency observed that some of the operators that have lost licences also have other fairly significant operations that are not affected by the ruling, which may provide some respite to their creditors.
Fitch has assessed that overall the volume of loans that are affected by the licence cancellations may be less than 0.2 per cent of the sector's total loan book.
Collective exposure
According to Reserve Bank of India data, scheduled commercial banks had a collective exposure of Rs 90,970 crore to the telecommunications sector as at December-end 2011. As at March-end 2011, the banks had an exposure of Rs 1,00,430 crore.
Fitch had previously highlighted that banks' ability to handle these exposures as a whole is finely balanced and further increases in exposure to the infrastructure sector may hurt the standalone credit profile of Indian banks.
The Supreme Court on Thursday ordered the cancellation of 122 licences granted in 2008 following a drawn-out investigation into corrupt practices surrounding the granting of the licences. The current licences will remain in place for four months.