Banking

RBI Asks Banks to Make Higher Provisioning For Loans to Telecom Sector

Directors of the banks must review the telecom sector latest by June 30, 2017.

A peace meeting between Jio and COAI executives will take place today and possible on Monday. Credit: Reuters

The sector currently has a debt of Rs 4.6 lakh crore.  Credit: Reuters

The Reserve Bank of India, on Tuesday,asked banks to make higher provisioning for loans to the telecom sector that is facing financial stress and closely monitor their exposure to avoid any adverse impact on businesses.

The sector has a debt of about Rs 4.6 lakh crore even as it is faces pressure on revenues and profitability in the wake of cut-throat competition following entry of Reliance Jio. The Reserve Bank said 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…,” it said in a notification.

Interest coverage ratio indicates capacity of an organisation to service the debt and ability to repay it over the tenure of the loan. It further asked 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 added. The RBI further said 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.

“The review may include quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets and stressed assets, industry performance and outlook, legal and regulatory issues faced by the sector, etc. The reviews may also include sector specific parameters,” the RBI added. In another notification, the RBI has prescribed a format for banks to disclose in the Notes to Accounts to the financial statements. This, the RBI said, is being done to ensure greater transparency and promote better discipline with respect to compliance with income recognition, asset classification and provisioning.