Private sector lenders may have a higher exposure to telecom companies, but it’s the public sector banks that could be worst hit by the Reserve Bank of India’s directive to review stressed loans and make higher provisions.

IndusInd Bank Ltd., Yes Bank Ltd. and Kotak Mahindra Bank Ltd. are among the banks that have the highest proportion of their loan book exposed to the telecom sector. They could see marginally higher provisions and credit costs in the June-ended quarter.

However, given their smaller loan book size, their exposure in absolute terms will be lower than that for government-owned banks. The public-sector banks will see a larger impact of provisioning, especially due to lower profit before tax (PBT) numbers, said Pritesh Bumb, equity research analyst at brokerage Prabhudas Lilladher.

The RBI on Tuesday flagged off the telecom sector as potentially stressed and directed banks to review their exposures by June 2017 and make appropriate provisions. Increased competition and price wars in the sector have led to a deterioration in the financials of telecom firms, which could hurt banks that have issued loans to them.

The aggregate interest coverage ratio of the telecom sector has fallen below one, noted the RBI. The interest coverage ratio is an indicator that measures the debt servicing ability of a firm. A ratio less than one suggests that a company does not earn enough to make good on interest payments.

A Credit Suisse report also suggests that an increase in provisioning will hurt profit for public sector banks in the ongoing financial year. Along with telecom, power is another sector which has seen the share of stressed debt rising, the report said. Bad loan recognition in both the sectors has remained relatively low, despite 67 percent of power sector and 46 percent of telecom sector debt having interest coverage of less than 1.

While the impact of the guidelines would depend on the quantum of provisioning decided by the boards, assuming a 50 bps increase in standard asset provisioning on power and telecom sector debt (currently 40 bps on standard asset) would impact FY18E profit by 5-15 percent for PSU banks and 1-2 percent of private sector banks.

Ashish Gupta and Kush Shah, Analysts At Credit Suisse, In A Report

Telecom Exposure: Who Has How Much

The banking sector has total funded exposure of Rs 82,200 crore (1.2 percent total of the banking sector advances) to the telecom sector as of February 2017, said Darpin Shah, an analyst at HDFC Securities Ltd. in a note to clients.

IndusInd Bank, Yes Bank and Kotak Mahindra Bank have an exposure of 4.8 percent, 3.8 percent and 3.7 percent, respectively, to the telecom sector, followed by Axis Bank Ltd. at 2.6 percent and HDFC Bank Ltd. 2.2 percent.

Government-owned banks, on the other hand, have lent lesser to the telecom sector than their private sector peers with Canara Bank Ltd.’s exposure at 2.2 percent and Bank of Baroda’s at 1.0 percent.

While smaller private banks such as Yes Bank and Indusind Bank had so far remained relatively cushioned from the bad loan problem that has affected the Indian banking industry, they might now have to provide for their larger exposure to the sector.

But Yes Bank and IndusInd Bank don’t face material credit risk, Suresh Ganapathy, analyst at Macquarie, wrote in a note to clients.

For smaller private-sector banks, we do not see any material credit risk on the exposure, as they are primarily exposed to the top-four players (Bharti Airtel Ltd., Idea Cellular Ltd., Vodafone India Ltd. and Reliance Jio Infocomm Ltd.) as they have 1) strong credit ratings or 2) strong balance sheets/backed by cash-rich parent companies. 

Suresh Ganapathy, Analyst, Macquarie

Exposure to smaller fringe players is a source of worry for banks because the price war is likely to have a greater impact on the debt-servicing capability of these companies, he said.

Highlighting another implication of the RBI’s directive, Nilanjan Karfa, analyst at Jefferies, said in a note that the central bank’s measures could be an indication of the implementation of IND-AS accounting standards.

This rule is perhaps an early experiment starting with the telecom sector, as banks move towards IND-AS implementation wherein they need to work with “Excepted Loss” behavior instead of “Realized Loss”.

Nilanjan Karfa, Analyst, Jefferies, In A Note To Clients – Bloomberg Quint


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