Indian banks' exposure to troubled telecom companies is not large enough to pose a systemic threat, but defaults could add to problems at banks with weak balance sheets, said Fitch Ratings.
The banking sector is already struggling with significant asset quality issues and is likely to require hefty capital injections from the government over the next couple of years, it added.
"The credit profiles of Indian telcos are under pressure from fierce competition stemming from the entry into the market of Reliance Jio last year and rising capex required for the roll-out of 4G services. Some companies could find it difficult to service their debt and we have the sector on a negative outlook," the credit rating agency said in a report.
Fitch observed that pressure is most severe at
The agency elaborated that the company's EBITDA (earnings before interest, tax, depreciation and amortisation) declined by 30 per cent in the financial year to end-March 2017 and its earning are unlikely to be sufficient to cover interest costs and capex over the coming year.
The agency assessed that liquidity was also poor, with cash and equivalents of Rs 1,400 crore ($220 million) well short of covering short-term debt of Rs 10,900 crore. Rcom's total debt is around $7 billion, a significant portion of which is owed to state-owned banks.
Debt servicing, according to Fitch, could also become at a problem at Aircel and Tata Telecom. Aircel is in the process of merging its wireless operation with Rcom, but the combined entity will still have limited pricing power and high leverage that will constrain its ability to strengthen its network position, it added.
"We expect both companies to remain under pressure," said the agency.
Meanwhile, Fitch referred to reports suggesting that Videocon India's lenders have already implemented a corrective action plan that could involve loan restructuring or forced asset sales.
The agency observed that Indian banks already have significant asset quality issues that could be made worse by stress in the telco sector. However, total debt owed by telcos to banks is only Rs 91,300 crore ($14 billion), accounting for just 1.4 per cent of all bank loans, according to the Reserve Bank of India.
Fitch said exposure to other troubled sectors is much larger. Lending to iron and steel companies, for example, accounts for 4.7 per cent of total lending. The power sector accounts for 8.7 per cent and the road sector for 2.7 per cent.
"Moreover, not all telcos face financial difficulties. Market leader, Bharti Airtel, is likely to meet repayments comfortably on the over $1 billion that it owes to banks.
"Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share. Idea's balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt," said the agency.
Meanwhile, Fitch felt that the risk of Tata Telecom missing payments is mitigated by the potential for its parent company, the Tata Group, to inject equity into its subsidiary. State-owned telcos, BSNL and MTNL, are likely to be in weaker positions, but almost all their debt is owed to the government.
Fitch explained that loans to telcos are also generally backed by spectrum assets, which should provide a better chance of recovery than, for example, a steel factory operating below capacity or a power plant that lacks a power purchase agreement. That said, the sale of spectrum assets might take longer than banks expect and not fetch full value, given that the top-three telcos now have sufficient spectrum to run their operations for the medium term.