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Banking - Funding to telecom sector for 2G/3G licenses - not a systemic risk to asset quality
n News flow
Supreme Court, on appeal by one of the NGO’s, has expressed concern over banks
providing loans to telecom companies against licenses as collateral and has included
bank’s lending to 2G license aspirants as one of the issues to be investigated by CBI in
the 2G spectrum allocation case.
We have assessed the issue in detail and interacted with banks management to get the
sense on:
· Banks exposure at risk due to non-roll out of 2G licenses by new players
· Lapsation, if any, in terms of adequate collateral or security
· Is 3G funding provided by banks at risk
n Our view
Risk on non-roll out of 2G license by new players is pegged at 50% of the
overall 2G license fee paid
While 2G licenses were awarded to both new and existing telecom operators, we believe
risk as far as banks are concerned would be restricted only on funding to new players, as
incumbent players had existing operations or cashflows to lien.
Out of the 122- 2G licenses awarded across 22 circles, 85 licenses were allotted to 6 new
telecom operators. The total amount spent on licenses by these new players was INR
76.6 bn. Uninor, Sistema and S-Tel have rolled out licenses in more than 60% of the
circles (in equivalent terms of license fee paid), Videocon in ~50% of circles while Loop
and Etisalat have failed to meet the targeted roll out in most of the circles.
Consequently, out of INR 76.6 bn paid, we believe the risk for banks on non-roll out of
2G licenses by new operators in terms of cancellation of licenses or penalties imposed by
the regulator is to the tune of INR 40 bn. Assuming debt : equity of 70:30, we believe
bank’s exposure for 2G lcensing would be pegged at less than INR 30 bn which would be
at risk if regulator calls for forfeiture of the license
Banks exposure to telecom is adequately secured and not a systemic risk
· Our interactions with bankers suggest that funding to telecom operators for 2G or
3G licenses are adequately secured. As far as established players are concerned, the
funding for 2G license was provided on adequate corporate guarantee, lien on
cashflows from existing operations or charge on telecom assets they hold.
· In case of most of the new players, financing for 2G licenses was primarily by way of
working capital (short term) loans against adequate corporate guarantee. Moreover
as the funding was at an SPV level there was recourse to parental guarantee
available. Financing conditionality would possibly include hypothecation of spectrum
on allotment as well. Moreover, there would be a tripartite agreement between
telecom operator, banks and DoT and if licensing is cancelled, under the agreement,
the amount deposited with DoT would directly flow to the bank.
· Financing of actual roll-out of network would be by way of term loans with escrow
mechanism in place apart from securities highlighted earlier. Moreover project
funding activity is milestone linked and banks have not disbursed any significant
amount to new players for rolling out 2G network that would pose any systemic risk
to asset quality
n 3G funding provided by banks not at risk
As far as financing for 3G licenses is concerned, we do not see any risk on banks as
licenses were allotted only to established players where the banks had comfort from
existing operations and ability to roll out from their track record. For 3G licenses, banks
have provided mainly working capital (short term) loan against adequate corporate
guarantee and lien on existing cashflows. Interactions suggest that banks would not have
entertained financing for 3G licenses on a standalone basis without any corporate level
guarantee or existing cashflows.
n Conclusion
Considering the overall assessment of banks financing for telecom licenses on above
parameters mainly extent of banks exposure at risk and adequate collateralisation, we
believe the concerns on banks telecom funding (for 2G or 3G licenses) are exaggerated
to an extent and will not pose any systemic risk to asset quality.
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