AGR verdict: Ball now in govt's court to salvage telcos, say banks

No scope for reworking repayment obligations unless there is a default, they say

As concerns over Vodafone Idea’s adjusted gross revenue (AGR) related dues cloud the business environment, banks with heavy exposure to the group say there is little they can do, and there is no scope for reworking repayment obligations of telecom operators, unless there is a default.

Senior public sector bank executives said any relief to the sector must come from the government first.

The outstanding debt of Vodafone Idea group is over Rs 1.25 trillion as of March 2019. Goldman Sachs said in a report that Vodafone Idea would be potentially the most impacted if the government does not provide any support.

Vodafone Idea’s debt excluding deferred payment liability is around Rs 28,000 crore, with cash and cash equivalents of Rs 15,400 crore as of September 2019, implying a net exposure of Rs 13,000 crore, according to Goldman Sachs.

However, bankers maintained that the loans are standard assets, which means the company has never defaulted on repayment obligations.

The Reserve Bank of India had earlier flagged telecom as a sector that could potentially cause pain for the banking sector. The central bank had increased standard asset provisioning weights for exposure to the sector.

Bankers said RBI cannot now dilute its standards just because one company is under stress. Moreover, the asset recognisition and provisioning norms will be like it is for other accounts.

A senior executive at a private bank said, “We expect the government to respond favourably to the curative petition that telecom companies may file. While the liability may not go away, we think the government will stagger the payment over seven years or so. This will take the burden off them.”

About a fortnight back, Rajnish Kumar, State Bank of India (SBI) chairman, had told Business Standard that it was necessary to sort out the issue of past liabilities, such as AGR, of the telecom sector. Kumar said telecom is an important infrastructure segment, which needed huge investments, but the impact of AGR issue on telecom is a definite concern. Kumar had said that the concerns will persist till the issue is sorted out, considering banks’ substantial exposure.

To tide over their difficulties, telecom players have raised tariff and the government in November also gave them two years to pay off spectrum dues, providing some relief.

Deferment of spectrum auction installments, which will start only after 2021-22, will ease the cash outflow of the stressed telecom service providers and facilitate payment of statutory liabilities and interest on bank loans, the government had said.

Though the exposure to Vodafone Idea may just be 2 per cent of the overall Non-performing Assets (NPAs) in the banking system, Goldman Sachs noted that a bad debt of this size would impact investor confidence and lead to higher risk aversion among banks towards the telecom players.

IDFC First Bank (IDFB), IndusInd Bank, and SBI are most exposed to Vodafone Idea’s debt with net worth exposure of around 11 per cent for IDFB. However, a large part of IndusInd Bank’s exposure is towards non-fund based liabilities in favor of the government, Goldman Sachs said.

Meanwhile, ratings agencies have also flagged likely pressure on the financial and credit profile of telecom operators.  Annalisa Di Chiara, senior vice-president, Corporate Finance, Moody’s Investors Service, said while it was a blow, the judgment was not a surprise and Bharti had already made provisions to help offset the impact on its balance sheet. Nevertheless, the impact on its credit profile will likely be significant, with both debt and leverage set to rise.

At the same time, the financial burden will likely further weaken Vodafone Idea’s ability to compete in the Indian market, potentially providing an opportunity for competitors Bharti and Jio to gain market share, Chiara said.

Gaurav Dixit, group head, CARE Ratings, said the agency is watching developments closely and look for the government’s decision on schedule for repayments (for AGR dues). In case there is some respite, the agency will have some comfort. Else, there will be pressure.

In November 2019, CARE had downgraded Vodafone Idea’s long-term rating from “A-” to “BBB-” on significant erosion in the overall risk profile of the company.