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As telcos’ SOS hits banks, lenders are wishing they hadn’t taken the call

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This was one call that Indian banks wished they hadn’t taken. Their exposure to the telecom sector, especially to troubled Vodafone Idea Ltd, is now threatening to add to the pile of stressed assets on their books.

The Supreme Court asked telecom companies to pay up their dues to the government last week and telcos have begun to scramble for the same. Bharti Airtel Ltd paid 10,000 crore on Monday, while Vodafone Idea said it would deposit 2,500 crore. Bharti Airtel and Vodafone Idea owe the government about 34,200 crore and 44,000 crore, respectively.

However, things are more complicated than they appear. Vodafone Idea’s total gross debt is 1.2 trillion, of which a lion’s share is owed to the government. But bank guarantees back the debt and, if the government decides to invoke these guarantees, banks will have to pay up on behalf of the company.

Analysts estimate that the exposure of banks is around 75% of the 1.2 trillion debt, largely through guarantees. “If the DoT invokes guarantees, the banks will have to pay on behalf of Vodafone Idea. Their exposure will become fund-based from non-fund based,” explained an analyst, requesting anonymity.

Graphic by Satish Kumar Sharma/Mint
Graphic by Satish Kumar Sharma/Mint

State Bank of India (SBI) has a total fund-based exposure of 31,600 crore to telcos, of which around 11,000 crore is to Vodafone Idea. Its non-fund based exposure to the sector is around 9,000 crore, according to the bank’s regulatory filings.

Meanwhile, the possibility that Vodafone Idea would turn into a non-performing asset is real. The company’s balance sheet is stretched with cash and equivalents of just 12,530 crore as of December. The fact that it has paid the government only 2,500 crore so far suggests the amount of cash left after accounting for working capital needs for the next couple of months is fairly low.

The drop in shares of most banks on Monday reflects the investors’ worries. However, some analysts pointed out that Vodafone Idea was willing to pay the dues, suggesting the company does not want to wind up.

The wave of impending stress from the telecom sector will add to an ugly quarter in terms of slippages for banks. Slippages have risen for most banks in the December quarter, primarily driven by troubled non-banking financial companies.

The worry is evident in the words of Rajnish Kumar, chairman of SBI, the country’s largest lender. Kumar said that banks will have to pay the price if any telco goes bankrupt, said a PTI report.

To be sure, some lenders have made provisions against emerging stress from the telecom sector. For instance, ICICI Bank Ltd has included stressed telco loans in its watch list and has provided for them.

Even so, the hit to profits in the forthcoming quarters cannot be ruled out. Importantly, the immediate blow from guarantees should be recognized.

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