Indian banks, reeling under the world’s worst bad-asset ratio, will have to set aside more funds than required to deal with bad loans from stressed sectors including telecom as brutal competition in the industry erodes profitability.
The Reserve Bank of India in a statement on Tuesday asked lenders to formulate a "policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors." The directive singles out the nation’s mobile-phone industry and seeks a review of norms by June 30.
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. Phone carriers, which borrowed to build networks and acquire expensive airwaves to lure customers in the world’s second-largest smartphone market, are now struggling to pay debt as price wars eat into profitability.
“RBI is taking preemptive measures as profitability in telecom sector is under pressure,” Siddharth Purohit, analyst at Angel Broking Ltd. said by phone. “Banks will have no room to kick the can down the road and will have to recognize and provide for exposure to stressed companies in the segment."
Operators were forced to slash prices to match Jio, in order to retain subscribers. Vodafone Group Plc.’s India unit, the nation’s second-largest carrier, is in the process of merging with third-ranked Idea Cellular Ltd., controlled by billionaire Kumar Mangalam Birla.
The telecom sector is reporting stressed financial conditions and the interest coverage ratio was less than one, the central bank said in the notification. The boards of the banks were directed to review exposure to phone companies by June 30, to ensure resilience in their balance sheet, the RBI said.
Last week, Bharti Airtel Ltd., India’s largest operator said that Jio’s continued free offers had left the telecom industry in a ”weak position” as carriers continue to bleed, and would make it difficult for companies to raise capital to invest and roll out broadband networks. The telecom industry had a consolidated debt of about 4.25 trillion rupees, according to an October report by ICRA Ltd. - Bloomberg