RBI asks banks to review exposure to debt-laden telecom sector

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RBI asks banks to review exposure to debt-laden telecom sector

"More immediately, as the telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one, Board of Directors of the banks may review the telecom sector latest by June 30, 2017, 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 future date".

The cancellation of 2G auctions and reallocation of 3G waves, all funded through bank loans, created stress on the balance-sheets of telecom companies.

According to Kotak Securities, the banking sector debt to telecom stands at Rs 82,000 crore as on February 2017, 1.2 per cent of the total bank loans.

Banks have also been asked to closely monitor their exposure to the sector.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, told DNA Money, "The cancellation of 2G auctions and reallocation of 3G auctions were funded through bank loans which had begun to cause stress".

Intense competition, fueled by the entry of India's newest carrier backed by billionaire Mukesh Ambani has prompted carriers to slash tariffs and consolidate, as Ambani's Reliance Jio Infocomm Ltd. offers free calls for life.

Even before Jio, the sector was burdened with debt.

Rating agency ICRA has projected that gross non-performing assets will increase to Rs 7.5-7.7 lakh crore by the end of FY17 and to Rs 8.2-8.5 lakh crore by the end of FY18.

"More immediately, as the telecom sector is reporting stressed financial conditions, and now interest coverage ratio for the sector is less than one, board of directors of the banks may review the telecom sector latest by June 30, 2017", the regulator said.

Referring to the circular on provisions against advances, the RBI said the provisioning rates prescribed in that circular are a regulatory minimum and banks are encouraged to make higher provisions on advances to "stressed sectors" of the economy. The interest coverage ratio is a financial ratio that measures a company's ability to make interest payments on its debt in a timely manner.

In a bid to ensure that banks are better prepared to deal with potential stressed assets, the Reserve Bank of India has asked them to put in place a board-approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.

At present, banks have to make a provision of 0.40 per cent of loan against standard or performing assets.

The RBI added that the policy shall require a review, at least on a quarterly basis, of the performance of various sectors of the economy.

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