RBI Asks Banks To Consider Raising Provisions Against Telecom Loans

Fearing that stress in the telecom sector could come to haunt Indian lenders, the Reserve Bank of India (RBI) on Tuesday asked banks to review their exposure to the industry and consider raising provisions against these loans.

The cautionary notice came as part of a wider advisory to banks to review provisions made against standard advances in stressed sectors. These are loans which may not have turned bad yet but signs of stress may be emerging in the sector. The central bank notice is an early warning to banks who have seen gross non-performing assets double over the past 18 months to more than Rs 7 lakh crore.

To ensure that banks recognise stress early, the RBI has asked them to put a board-approved policy in place for provisions against standard assets. It reminded banks that the regulatory prescription for provisions is the minimum requirement and prudent banking may require higher provisions.

The policy should take into account the performance of various sector of the economy and emerging risks and must be reviewed on a quarterly basis.

At present, the mandated provisioning against standard assets is set at between 0.25 percent to 1 percent for different sectors.

Telecom Red-Flag

In particular, the regulator raised a red flag about telecom sector loans. Increased competition and price wars in the sector have led to a deterioration in the financials of telecom firms, which in turn could hurt banks that have issued loans to them.

The aggregate interest coverage ratio of the telecom sector has fallen below 1, noted the RBI. The interest coverage ratio is an indicator that measures the debt servicing ability a firm. A ratio less than 1 suggests that a company does not earn enough to make good on interest payments.

Banks should also subject telecom sector loans to closer monitoring, said the RBI. The regulator has been highlighting the debt build up in the telecom sector for some time now. In the December 2016 edition of its Financial Stability Report, the RBI had noted that telecom is among the three most indebted sectors along with iron and steel and power.

Concerns have also been raised by private agencies.

According to a September 2016 report by industry body ASSOCHAM and consulting firm KPMG, companies in the telecom sector have an accumulated debt of Rs 3.8 lakh crore. Brokerage house Credit Suisse in a February report said that 45 percent of the telecom sector debt is held by companies with an interest coverage (IC) ratio less than one.

Pushing For Greater Transparency

In a separate notification, the RBI pushed for greater transparency in recognition of bad loans. From here on banks will be required to make specific disclosures if their assessment of bad loans and provisions is significantly lower than the regulator’s assessment.

• Banks will need to make a disclosure if the additional gross NPAs identified by RBI exceed 15 percent of the published incremental gross NPAs.
  
• They will also need to make a disclosure if additional provisioning requirements assessed by RBI exceed 15 percent of published net profit.

Fears that banks were significantly under-reporting bad loans led the RBI to conduct an asset quality review across the sector in 2015. The surge in reported NPAs since then has confirmed these fears.