The Indian banking sector should be able to absorb loan-losses stemming from the cancellation of second-generation mobile licenses without materially impairing credit quality, though Fitch Ratings believes annual profits will still take a hit.
Indian banks' exposure to the telecom companies that are losing 2G licenses is around 0.6% of total loans. However, around half of the exposure is in the form of financial guarantees towards future payments of license fees. State Bank of India has confirmed that, once the licenses are cancelled, those guarantees should no longer be in force.
While the future of smaller telecom operators in India remains uncertain, we note that some of the operators that have lost licenses also have other fairly significant operations that are not affected by the ruling, which may provide some respite to their creditors.
In total, therefore, the volume of loans that are affected by the license cancellations may be less than 0.2% of the sector's total loan book. Assuming a conservative level of write-offs on these loans, we believe that banks' credit quality will not be materially weakened, but that annual profits could fall by up to 10%.
The Indian Supreme Court on Thursday ordered the cancellation of 122 licenses granted in 2008 following a drawn-out investigation into corrupt practices surrounding the granting of the licenses. The current licenses will remain in place for four months.
While the impact is limited, we believe the cancellation of the 2G licenseshighlights the Indian banking sector's exposure to infrastructure - a sector that continues to face high regulatory and execution risks. We have previously highlighted that banks' ability to handle these exposures as a whole is finely balanced and further increases in exposure to the infrastructure sector may hurt the standalone credit profile of Indian banks.