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Banks (Finance)

2G Licence Controversy: Banks on High Alert as Lenders Fear Massive Defaults

Strategic Insights

— 1 min read

The ongoing controversy surrounding the 2008 allocation of second-generation (2G) licences and spectrum to five telcos has created a high-risk scenario for lenders, with many warning of potential defaults worth tens of thousands of crores. The Department of Telecommunications (DoT) has sent notices to five telcos, including STel, Swan Telecom, Unitech Wireless, Videocon, and Loop Telecom, asking them to explain their role in allegedly bending the rules while applying for these licences. The sector, which will require an estimated '50,000-60,000 crore over the next two years to fund expansion, including the rollout of 3G services, is facing a significant funding crunch.

Key Takeaways:

  • The controversy over 2G licences has increased the risk of default for telcos, with Vikas Agarwal, senior vice-president at credit rating firm Icra Ltd, warning that some companies may struggle to meet repayment commitments.
  • The five telcos, which were issued licences in 2008, have loaned around '14,000 crore to these telcos from government-owned banks through short-term, working capital loans and bank guarantees.
  • Authors at government-owned banks have threatened to consider legal recourse to ensure repayment if the licences given to these telcos are cancelled.
  • The DoT's notices to the five telcos are likely to prevent them from applying for new licences, further exacerbating the funding crisis in the sector.
  • Analysts predict that banks may become extremely risk-averse and unlikely to lend to telcos in the future if the licences are cancelled.

Statistics:

  • The sector will require an estimated '50,000-60,000 crore over the next two years to fund expansion, including the rollout of 3G services.
  • Banks' exposure to telcos increased to £50,326 crore by 31 March 2009 from £19,446 crore as of 31 March 2007.
  • Government-owned banks have loaned around £14,000 crore to the five telcos through short-term, working capital loans and bank guarantees.

Sources:

  • Vikas Agarwal, senior vice-president at credit rating firm Icra Ltd
  • A. Raja, former telecom minister
  • Kapil Sibal, current telecom minister
  • Department of Telecommunications (DoT)
  • State Bank of India (SBI)
  • Punjab National Bank (PNB)
  • IDBI Bank Ltd
  • Credit Analysis and Research Ltd
  • Comptroller and Auditor General of India

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