Concerned over the “stressed financial conditions” in the telecom sector, the Reserve Bank of India (RBI) has ordered the boards of banks to review the telecom sector loans and consider making provisions for standard assets in this sector at higher rates. The RBI directive to banks on telecom sector loans has come at a time when competition has hot up in the segment and there were reports of stress from the companies. The telecom operators, according to an Assocham-KPMG study, have an accumulated debt of around Rs 3,80,000 crore.
“As the telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one, board of directors of the banks may review the telecom sector latest by June 30, 2017, 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,” the RBI said.
“Besides, banks should also subject the exposure to the sector to closer monitoring,” the RBI said. “Now that the RBI has said the interest coverage ratio is less than one, banks will have to be careful in extending further loans. It’s risky and banks may not even consider fresh financing,” said a banking source. The interest coverage ratio is a financial ratio that measures a company’s ability to make interest payments on its debt in a timely manner. If the ratio is less than 1, it means the company is not making enough money to pay its interest.
While the RBI’s deadline on cleaning up the banks’ balance sheets will be over by Q4 of 2016-17, banks are preparing to make further provisions in the Q4 results. Banks had made additional provisions in the case firms in steel, textiles, chemicals and infrastructure following the RBI directive. The provisions — typically 85 per cent is for non-performing assets — amount to over Rs 117,000 crore in the last three years (2014, 2015 and 2016). However, growth in provisions has slowed down sharply in Q3 of FY17 from 106.2 per cent to – 8.0 per cent. This was more because of very high provisioning being made in 2015 following the RBI’s guidance, said a CARE Rating report.
In a related measure, the RBI has directed banks that they should 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 policy shall require a review, at least on a quarterly basis, of the performance of various sectors of the economy to which the bank has an exposure to evaluate the present and emerging risks and stress therein,” the RBI said.
“The review may include 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. The reviews may also include sector specific parameters,” the RBI said.
Currently, the provisioning rates are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy, the RBI said. Gross NPAs of banks are project to increase to 9.9-10.3 per cent by the end of fiscal 2018 as against 9.5 per cent as of December 2016) with further upside risks because of possible slippages from large accounts under the “standstill clause” pertaining to the various schemes for resolution of stressed assets.
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