Impact of 2G cancellations on Indian banks limited: Fitch

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, says ratings agency Fitch Ratings, thought it believes annual profits would still take a hit.

Indian banks' exposure to the telecom companies that are losing 2G licenses is around 0.6 per cent 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.

It said in a report, "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.

"Therefore, the ratings agency said, the volume of loans that are affected by the license cancellations may be less than 0.2 per cent 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 per cent."

The  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 (See: SC cancels all 2G licences, orders fresh spectrum auction). The current licenses will remain in place for four months.

While the impact is limited, we believe the cancellation of the 2G licenses highlights 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.