When the RBI requested for a lenient approach to the telecom AGR dues, they were principally worried about the huge exposure that banks had to the telecom sector. With Supreme Court rejecting the curative petition to review the AGR order, it does look like the options for the telecom companies are limited. Why is it necessary to resolve the telecom tangle fast and how to go about it?
Financial exposure is huge
Just last week, Templeton wrote down its exposure to Vodafone Idea ahead of a downgrade by rating agencies. Overall exposure of the mutual fund industry to telecom sector is just about Rs.4,500 crore and that may be the smallest of the problems. But the real problem could be with bank loans. Banks have lent over Rs.300,000 crore to the telecom sector and nearly Rs.125,000 crore is owed by Vodafone Idea to the banks. With the current level of ARPUs and the huge burden of Rs.53,000 crore in the form of AGR dues, there is a very small chance that Vodafone Idea would be really able to survive beyond 2020. That would mean very little can be recovered by banks as the government AGR charges would take precedence over any repayments to banks. Even if you consider the enterprise value of the combined business, there will be a big hole for the banks. With Birlas and Vodafone PLC ruling out fund infusion, the entire onus is on the banks. Here is how telcos can be rescued quickly.
Why state intervention?
One can always raise a question as to whether and why the state should intervene. There are multiple reasons for the state to intervene. Firstly, the Indian banking system cannot afford another major bankruptcy. Secondly, this may end up creating a duopoly that will defeat the entire effort of inducing competition in the telecom sector. After all, a duopoly will mean that the telecom service provider will continue to have an upper hand in pricing telecom services. Lastly, state intervention has to strike a balance between systemic risk and moral hazard. Pushing telecom sector at this juncture will be a bigger systemic risk than a moral hazard.
How to handle telecom?
One thing is clear that the government will have to take initiative in resolving the telecom mess. The government must retain the interest component on AGR but waive the penalty as a special case. Telecom companies must show their commitment by paying the interest amount upfront to qualify for a waiver of penalty and moratorium on principal. If the telecom companies see a business case, even Vodafone and Birlas will be willing to fund the gap. But the need of the hour is to act fast. The government must act before the downgrades start pouring in, because otherwise it may get too chaotic to handle. It is not about kid’s gloves, it is about pure survival! ©