Telecom AGR dues may have bankers biting nails as they watch their money disappear

FE Online

After the Supreme court's ruling on Airtel-Vodafone AGR dues, the banking industry could also face repercussions should there be any defaults linked to the court's decision. The banks have lent 1.3 per cent of their total loans to telecom companies, Fitch Ratings said in its report. Among loans granted to telcos, Bharti Airtel and Vodafone idea account for a major share. Fitch said this exposure to the telecom sector is bigger among private sector banks than the state-run ones. Potential telecom defaults will trigger additional problems within the banking sector, despite private banks having stronger capital and income buffers.

"This would add to the recent strains associated with real estate and non-bank financial institutions and could set back recovery from the sector’s weak financial performance," said Fitch Ratings. The agency further said, "The court’s rulings, in this case, could also have significant repercussions for India’s banking sector, as well as the country’s broader economic outlook. If this continues to impinge on credit growth, it could also limit improvement in India’s macroeconomic outlook."

Moreover, Fitch has said that the Supreme Court’s rejection of relief to telecom companies from hefty AGR dues is credit negative for the industry. Earlier last week, the Supreme Court rejected a review petition against its earlier ruling in a long-running telecommunications sector tax case. Last year, Fitch had placed Airtel's ratings on 'Rating Watch Negative (RWN) outlook'. "We will resolve the Rating Watch Negative on Bharti’s rating, based on our assessment of the positive impact of EBITDA growth from announced tariff hikes by all telcos in December 2019 and taking into consideration likely subscriber addition should Vodafone Idea gradually exit the industry," Fitch Ratings said.

However, Fitch also noted that Bharti Airtel's management is committed to "maintaining an investment-grade rating" and raised about $7.6 billion in equity in the last 12 months. Vodafone Idea, on the other hand, could face severe liquidity stress as a result of the tax case. Its cash balance of $2.2 billion as of September 2019 would be insufficient to pay its $6.3 billion of unpaid dues.