Indian banks’ exposure to troubled telecom companies is not large enough to pose a systemic threat, but defaults could add to problems at banks with weak balance sheets, said Fitch Ratings.
The banking sector is already struggling with significant asset quality issues and is likely to require hefty capital injections from the government over the next couple of years, it added.
“The credit profiles of Indian telcos are under pressure from fierce competition stemming from the entry into the market of Reliance Jio last year and rising capex required for the roll-out of 4G services. Some companies could find it difficult to service their debt and we have the sector on a negative outlook,” the credit rating agency said in a report.
Fitch observed that pressure is most severe at Reliance Communications(Rcom), which it downgraded last week to ‘CCC’ to reflect the real possibility of some kind of default.
The agency elaborated that the company’s EBITDA (earnings before interest, tax, depreciation and amortisation) declined by 30 per cent in the financial year to end-March 2017 and its earning are unlikely to be sufficient to cover interest costs and capex over the coming year.
The agency assessed that liquidity was also poor, with cash and equivalents of Rs.1,400 crore ($220 million) well short of covering short-term debt of Rs.10,900 crore. Rcom’s total debt is around $7 billion, a significant portion of which is owed to state-owned banks.
Debt servicing, according to Fitch, could also become at a problem at Aircel and Tata Telecom. Aircel is in the process of merging its wireless operation with Rcom, but the combined entity will still have limited pricing power and high leverage that will constrain its ability to strengthen its network position, it added.
“Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share. Idea’s balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt,” said the agency.
Meanwhile, Fitch felt that the risk of Tata Telecom missing payments is mitigated by the potential for its parent company, the Tata Group, to inject equity into its subsidiary. State-owned telcos, BSNL and MTNL, are likely to be in weaker positions, but almost all their debt is owed to the government.
By Baishakhi Dutta
