Banks' profit may reduce 10%: Fitch

Indian banks, with exposure to second-generation mobile service licence, may see yearly profits fall by up to 10 per cent due to provisions for losses, according to Fitch. Even so, the rating agency said on Friday Indian banks sector should be able to absorb loan losses stemming from the cancellation of these licences without materially impairing credit quality.

The statement comes a day after the Supreme Court ordered the cancellation of 122 licences granted in 2008 following a drawn-out investigation into “corrupt practices” surrounding granting of licences. These licences will remain in place for four months.

Fitch said the banks’ credit quality — assuming a conservative level of write-offs on these loans — would not be materially weakened, but that annual profits could fall by up to 10 per cent. In total, volume of loans affected by the licence cancellations might be less than 0.2 per cent of the sector’s total loan book.

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.

The 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, Fitch said.

The future of smaller telecom operators in India remains uncertain. But some operators who lost licences have other operations not affected by the ruling. This might provide some respite to their creditors.

Meanwhile, analysts estimate that ING Vysya had exposures of Rs 697.5 crore to Sistema Shyama Teleservices and Rs 763 crore to Unitech Wireless (Tamil Nadu) as of end March 2011. Among the NBFCs, IDFC has a large telecom exposure (21 per cent of total exposure). However, its exact exposure to 2G licencees affected by the court ruling is not certain.