The cost of inaction

RBI is the latest to signal telecom sector's deepening woes

The telecom contagion is spreading. After the networks and the government, it is time for the banks to prepare for a hit. The Reserve Bank of India (RBI) has come up with guidelines to step up standard provisioning in telecom. As the interest coverage ratio of the networks has fallen below one, which means their operating profit is not enough to meet their interest obligations, it has asked the banks to review the sector latest by June 30 and “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 later date”. The increased provisioning is expected to impact the profits of banks in the current financial year. All told, the networks have a debt of over Rs 4,00,000 crore on their books.

It is worth noting that in its Financial Stability Report of December 2015, the RBI had found telecom still healthy as compared to power and steel. In the December 2016 edition of the report, the RBI had added telecom to the list of sectors that have contributed to more than 60 per cent of the stress on banks; the others being infrastructure, steel, textile, and power. The latest circular shows that the performance of the telecom sector has worsened sharply since then. Bank finance is crucial when networks bid for spectrum in auctions. With telecom loans under the lens, it is doubtful if the telecom companies will have enough money to participate in this year’s auctions. This has ominous portents for the government’s revenue.

The networks went into a financial tailspin after Reliance Jio’s extended free offer. The rule book says that a newcomer can have an introductory offer for 90 days, but the Reliance Jio offer, which was launched in early September, lasted until March, though under different names. The incumbents were left with no option but to drop tariffs. This, in turn, grievously hurt finances across the board. Analysing the numbers for the quarter ended December 31, Credit Suisse has calculated that the sector EBITDA (earnings before interest, tax, depreciation and amortisation) fell 16 per cent year-on-year and 14 per cent quarter-on-quarter. Only one of the four listed networks, Bharti Airtel, reported a profit in the quarter. Another report by India Ratings and Research had predicted that the industry has lost about 20 per cent of revenues after the launch of free services by Jio.

With reduced earnings, the government for the first time faces the prospects of a shortfall in its telecom revenue. In a letter to the Telecom Regulatory Authority of India, the former department of telecom secretary, JS Deepak, had flagged the issue. Both licence fee and spectrum user charge, which the government collects from the networks, are known to have fallen sharply in recent months. Much of this pain could have been averted if the regulator had acted early and stopped the Reliance Jio offer after 90 days. A finance ministry official reiterated this point last week and asserted that Trai’s inaction may well have triggered the collapse of the sector, which will have a telling impact on the banks. The cost of its inactivity will be paid by the networks, government and now also banks over the next few quarters.