MUMBAI: The Reserve Bank today asked banks to review immediately exposure to the telecom sector, which has a debt of Rs 4.6 lakh crore, and make higher provisions to firewall their business against any future stress.
The telecom sector is facing the squeeze on revenues and profitability in the wake of cut-throat competition following entry of Reliance Jio. On the RBI notification, industry body COAI said the government should address the issue of financial plight of the telecom sector with "utmost urgency" and make a renewed push for lower levies as mooted by the telecom regulator.
Banks have been asked to put in place a board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.
"More immediately, as the telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one, boards of directors of the banks may review the telecom sector latest by June 30, 2017...," the RBI said in a notification.
Interest coverage ratio indicates the capacity of an organisation to service the debt and ability to repay it over the loan tenure. The central bank further instructed banks to "consider making provisions for standard assets in this sector" at higher rates so that necessary resilience is built in the balance sheets "should the stress reflect on the quality of exposure to the sector at a future date".
Besides, banks should also subject the exposure to the telecom sector to closer monitoring, it suggested.
According to RBI, bank boards should frame policy on making provisions for standard assets at higher rates at least once a quarter. The review should be to access performance of various sectors of the economy to which the bank has an exposure to evaluate the present and emerging risks and stress therein.
Banks are required to provide standard asset provision of 0.40 per cent. Speaking to PTI, COAI Director General Rajan Mathews pitched for tax holiday for telecom companies.
"We are glad that the RBI has taken note of our contention that the industry is in financial stress. We had warned continuously that companies are hard pressed to make payments to the government and the banks," he said.