According to new report by rating firm Fitch, 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.
It said that, 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.
The report added that 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.
It added that pressure is most severe at Reliance Communications (Rcom), which we downgraded last week to 'CCC' to reflect the real possibility of some kind of default. The company's EBITDA declined by 30 percent 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.
Fitch further added that debt servicing 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. We expect both companies to remain under pressure.
"Moreover, not all telcos face financial difficulties. Market leader, Bharti Airtel, is likely to meet repayments comfortably on the over $1 billion that it owes to banks. 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. Meanwhile, 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," Fitch further said.
It also pointed out that loans to telcos are also generally backed by spectrum assets, however the top-three telcos now have sufficient spectrum to run their operations for the medium term.