Indian banks should be able to absorb loan-losses stemming from the cancellation of second-generation mobile licenses without materially impairing credit quality.
The Indian Supreme Court recently 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.
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, 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, the volume of loans that are affected by the license cancellations may be less than 0.2% of the sector's total loan book.
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