Banks bracing up for a massive spike in stressed loans after SC AGR order

Say loans may not immediately turn into bad debt, but a big chunk of it eventually could

With the Supreme Court adopting a tough stance on telecom dues, banks are bracing up for a massive spike in their stressed loans. “It is (now) for the telecom companies to provide what course of action to take,” said State Bank of India (SBI) Chairman Rajnish Kumar, on the sidelines of Nasscom summit.
 
The bank’s funded exposure to the telecom sector is around Rs 29,000 crore. On the non-funded front, it will be another Rs 14,000 to Rs 15,000 crore, Kumar said. According to Kumar, SBI had non-performing asset (NPA) of Rs 9,000 crore in the sector, which has been fully provided for, and the bank even expects some recovery. SBI, however, did not set aside provision on the ‘standard assets’, or the part that is regularly serviced. 

 
But the bank is also harboring no illusion. “We are prepared for the worst scenario,” Kumar said.
 

The SBI chairman, in many ways, is reflecting the sentiment of the entire banking system.
 
The loans may not turn into bad debt immediately, but a big chunk of it eventually could, fear bankers and analysts. The telecom companies owe banks at least Rs 1.8 trillion, in which fund-based exposure itself is about Rs 1.24 trillion, an analysis of the top-10 exposure by banks reveal.
 
According to the Supreme Court order, the telecom companies will have to pay Rs 1.47 trillion of their adjusted gross revenue (AGR) dues to the Department of Telecommunication by March 17.

 
This includes dues from even companies that have become defunct or turned bankrupt. However, the NPAs in them are not clear as banks don’t disclose the number.
 
Vodafone Idea will have to pay Rs 53,000 crore, Bharti Airtel needs to pay Rs 35,600 crore, and Tata Teleservices owes Rs 14,000 crore in dues even as it sold its mobile business to Airtel.
 
Vodafone Idea Chairman Kumar Mangalam Birla has already stated that if there is no relief from the government on the AGR dues, the company may have to close down. “If we are not getting anything, then I think it is end of story for Vodafone Idea,” Birla had said in early December. “It does not make sense to put good money after bad… We will shut shop.”

 
If Vodafone had to close down, it would be a big blow for the banking industry.
 
Bankers say the only money they can expect to recover in that case would be by selling old 3G and 4G spectrums to existing players in insolvency proceedings. With the new 5G spectrum auctions due soon, the haircut will be very steep.
 
According to a senior IDBI Bank executive, the bank has unfunded exposure in the form of guarantees (mostly in Vodafone). This will become funded exposure only when the beneficiary invokes the guarantee.  Even after it becomes funded exposure, the borrower gets three months to repay. Failing to repay makes it a non-performing asset and will attract 15 per cent provisioning for the first year. Thus, the bank does not see any immediate impact on its books.

 
The immediate hit on banks through provisioning will be damaging enough.
 
“After recognising DHFL as a non-performing account in the previous quarter, the banking sector may have to deal with heavy losses from another large corporate account,” said Nitin Aggarwal, banking analyst at Motilal Oswal Securities.
 
“The SC observations on Friday have raised concerns on the asset quality of banking system as many of them have sizeable fund, plus non-fund exposure to the telecom sector, mainly Vodafone Idea which is under severe stress. Amongst banks, SBI, IDBI Bank, YES Bank, IndusInd Bank, and IDFC First Bank have relatively higher exposure. Of these, only IDFC First Bank has made 50 per cent provisions during the last quarter,” Aggarwal said.

 
Early this week, Moody's revised the outlook on IndusInd Bank to ‘negative’ from ‘stable’ to account for the risk of further asset quality deterioration owing to the ongoing stress in the telecom sector. Analysts and bankers would await more clarity on the whole issue on March 16, the next date of hearing.