In an unusual directive, the Reserve Bank of India (RBI) on Tuesday asked banks to provide higher provisioning for good loans, given to stressed sectors, starting immediately with loans given to the telecom sector.
At present, the RBI mandates banks to provide 0.4 per cent as provision for a good loan as ‘regulatory minimum’, indicating the provisions could be higher.
The RBI’s singling out of the telecom sector is particularly interesting. In its various publications, most notably in the Financial Stability Report (FSR), the RBI has said five sectors – infrastructure, steel, textiles, power and telecom – have contributed to more than 60 per cent of bank stress. Steel, power, transport and other infrastructure sectors have created a huge problem of non-performing assets (NPA) to banks.
The telecom industry had outstanding debt of nearly Rs 4 lakh crore, incurred mainly on account of payments for spectrum, spectrum usage charges and other levies. The beleaguered industry had written to the Department of Telecom apprising it about the financial situation. As of September 2016, the total debt of listed telecom companies was at Rs 2,14,477 crore.
Udit Kariwala, senior analyst, financial institutions, India Ratings, said the stressed assets in the telecom sector is estimated at about Rs 1,00,000 crore. Most of the loans are still shown as standard assets though they show all signs of stressed assets, he added. For restructured advances, which are treated as standard assets, banks have to make a provision of five per cent.
The RBI’s cautioning on the telecom sector could be seen in that context. The interest coverage ratio of the sector, presently, is less than one, the RBI said. A ratio of less than one indicates that companies are not able to service their full interest from the operating profit, a clear indication of high stress. In addition, the companies are also reporting “stressed financial conditions,” the RBI noted.
“We are glad that the RBI has taken note of the financial issues of the industry. The stress level has caused major financial problems to the companies and we feel that the time has now come that the government addressed this issue,” Rajan Mathews, Director General, Cellular Operators Association of India said.
The central bank’s notification said the bank boards should review the telecom sector loan by June 30, “and consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date.”
“Besides, banks should also subject the exposure to the sector to closer monitoring,” the RBI notification said.
The central bank has been warning about the telecom sector for quite some time.
For example, the FSR, published in December 2015, showed that telecom sector was still relatively healthy compared with power and transport, which saw restructured assets and bad debts in double digits.
In the December 2016 report, however, the RBI started getting concerned about the high leverage in the telecom sector.
While reviewing the sector, the banks should review quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc, Besides, sector specific parameters should also be taken into consideration, the notification said.
The higher provisioning for standard loans would be applicable to all sectors that are in stress, the RBI said. However, the central bank did not specify the extent of increase in provisioning.
“Banks shall put in place a board–approved 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 RBI’s notification said.
The provisioning goes up as the company fails to service the interest on its loans within 91 days. The RBI did not specify how much of additional provisioning should be made by banks, but said it should be sector-specific and should be reviewed at least on a quarterly basis.