RBI 'reminds' banks on need to make additional provisioning for telco loans

Follow spirit of April 2017 communique with reference to sector

The Reserve Bank of India (RBI) has informally reminded banks of the need to make additional provisioning for ‘standard’ telecom loans and specific exposures in the sector with a high probability of being declared non-performing assets (NPAs) in their books down the line.

The RBI’s move is the first on the treatment to be accorded to the sector’s exposures by banks following the Supreme Court’s (SC’s) order of October 24, 2019. The SC order had said telephony players were to pay past airwave charges and licence fee dues, according to the adjusted gross revenue (AGR). This has been calculated by the government to be at Rs 1.33 trillion.

It also marks a significant follow-up to the banking regulator’s April 17, 2017, communiqué — when it had singled out the telecom sector for additional provisions for standard advances at higher than the prescribed rates. “The said notification was more in the form of moral suasion, very important nonetheless. But now that the stress is in front of us, it means we have to get cracking on these accounts,” said a senior banker.

It has been learnt that while a clutch of banks did provide in excess of the 40-basis points (bips) mandated for ‘standard’ loan exposures (defined as those which are perfectly in order) — by as much as 100 bips — this was later reversed.

Many banks had also gone easy on a closer scrutiny of these accounts, despite being told to do so by the central bank.

The total debt riding on the sector has been estimated to be nearly Rs 4 trillion, but a banker pointed out the entire amount is not at risk; some say at worst this will be Rs 1 trillion, including Reliance Communications, which is undergoing bankruptcy proceedings. “We are talking about specific accounts, and how they have been structured. It could be that even on the same account, some banks within the consortium are better placed,” said a banker.

The central bank’s reminder on additional provisioning on ‘standard’ advances will apply to Reliance Jio, Bharti Airtel, and Vodafone Idea as a matter of hygiene. “But in the case of Vodafone, we may have to provide substantially (if we are to follow the spirit of the April 2017 advisory), even though the account is still current in our books and has not been classified NPA,” said another banker. 

Incidentally, IDFC Bank has made a 50 per cent provisioning for a legacy telecom account of Rs 1,622 crore for the third quarter of 2018-19 — the bank did not name the account. This resulted in the bank reporting a net loss of Rs 1,639 crore for the quarter, though it was lower than the loss of Rs 2,504 crore posted in the corresponding period of the preceding fiscal year. “We now have a range on the treatment to be accorded on telecom loans — from a benign mark-up over the 40 bips mandated on ‘standard’ loans to the hefty provisioning made by IDFC Bank,” said a third banker. All eyes are on the next meeting of the banking consortium to Vodafone Idea, led by the State Bank of India — it will hold the key for banks as to how they move ahead on sectoral exposure. This is notwithstanding the relief expected by telecom players from the Centre after the SC ruling on AGR.

While the RBI’s April 2017 notification was for the sector as a whole, and not limited to service providers, it is not clear if banks are to be proactive on all exposures which have been affected by the SC order.

In the aforementioned notification, the RBI said: “More immediately, as the telecom sector is reporting stressed financial conditions, and presently the interest coverage ratio for the sector is less than one, the board of directors of banks may review the telecom sector latest by June 30, 2017. And that banks consider making provisions for standard assets in this sector at higher rates, so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date. Besides, banks should also subject the exposure to the sector to closer monitoring”.

The RBI’s Financial Stability Report of December 2019 notes that telecom topped all the sectors, with increasing average risk weight (ARW). During the six-month period between end-March 2019 and September 2019, the ARW for telecom moved to 34.2 per cent, from 27.4 per cent. Infrastructure had a higher ARW at 65.9 per cent, but hardly moved from the 65.8 per cent during the same period.

NO MORE MISSED CALLS

• Additional provisioning on ‘standard’ advances will apply to Jio, Airtel, and Vodafone Idea as matter of hygiene
• A clutch of banks did provide in excess of 40 bps mandated for ‘standard’ loan exposure —by as much as 100 bps — but reversed it later
• Banks are to be proactive on provisioning, even if account is not NPA after banking regulator’s ‘reminder’
• IDFC Bank made 50% provisioning on a legacy telecom loan of ~1,622 crore for Q3FY19
• Total debt to telecom is estimated to be at ~4 trillion, but entire amount not at risk; at worst, it will be ~1 trillion
• Average risk weight for telecom rose to 34.2%, from 27.4%, between March 2019 and September 2019 — highest deterioration for any sector