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Coal mine, telecom spectrum auctions may boost bank credit growth

The windfall the government is reaping from the auction of telecom airwaves and coal mines will not only fill its coffers, but may also deliver a much-needed boost to corporate demand for bank credit when the winning bidders raise money to pay for the resources. The government expects to raise a little over Rs.3 trillion cumulatively from these auctions. Bankers expect credit growth to pick up in the year starting 1 April, helped by demand for loans from telecom firms as well as mining-linked companies. They expect business sentiment to improve particularly in the second half of the financial year, which may prompt companies to borrow more to invest in new projects. Bankers are likely to insist on more equity when lending to projects, especially in coal-linked sectors like power and steel that have faced delays in the last few years. The fact that these auctions are leading to significant capital expenditure and investment opportunity for companies will give a fillip to credit growth, said Shyam Srinivasan, managing director and chief executive officer at Federal Bank Ltd. Credit growth has slowed to 10.2% so far this fiscal year—the slowest pace since the financial year 1996-97, according to data available for the period until 6 March. Two rounds of coal block auctions have already fetched the government Rs.2.09 trillion from 33 blocks. Of this, Rs.1 trillion came from the auction of 19 mines in the first round, which ended in February. In the spectrum auction, after 104 rounds of bidding, the department of telecommunication (DoT) has already received bids worth Rs.1.05 trillion. Expectations are that a majority of the funds (up to 70%) that these companies will raise will come through debt—mostly loans from banks. Telecom companies have also been allowed by the Reserve Bank of India (RBI) to raise foreign currency debt to pay for the spectrum. “Companies have already started approaching banks for guarantees,” said P. Mukherjee, group executive, corporate and international business, at Axis Bank Ltd. “This will continue in the first and second quarter of next year when these companies will seek additional credit. There will also be a phase in which these plants will start getting active, which will increase the demand for working capital loans in sectors like power so all that will have a cascading effect on credit.” Mukherjee said companies may have to put in more equity to increase the level of comfort banks have in lending to these projects. Lenders are wary of advancing money to such projects because of issues with regard to repayment and also given that coal-linked sectors like power and steel have faced project delays in the last few years. The fact than more than 70% of the loans restructured in the banking industry in the last couple of years are linked to coal mining would make bankers wary, said Vaibhav Agrawal, vice-president of research at Angel Broking Pvt. Ltd. “One must also realize that payments in the auctions are not one-time payments. These payments will be made on a staggered basis—in some cases up to 10 years. But the fact that these sectors are now allocated mines which were stuck because of court orders is a dramatic risk reliever for banks,” Agrawal said. Coal mines became a political hot potato after the Comptroller and Auditor General (CAG) accused the former United Progressive Alliance (UPA) government of causing the exchequer a loss of Rs.1.86 trillion by choosing not to auction these mineral blocks. Following this, in September, the Supreme Court cancelled the allocation of 204 coal mines allocated in the past two decades. Bankers said they will tread with caution. “We will be looking at each individual case closely before agreeing to lend. In case of coal allocation, if there is a company where the coal allocation was earlier cancelled and has now been given back, then it is in our interest to look at lending to them again,” said B.K. Batra, deputy managing director at IDBI Bank Ltd. He confirmed that some companies that had approached bankers for guarantees have already received them. Batra said in the case of spectrum allocation, while bankers will be assessing the lending opportunities as soon as any applications come in, most companies will try to first use their own resources before turning to banks. “These companies need to focus on upgrading the products and services that they offer to subscribers. In such cases, where the company has a viable business model and is a standard borrower, we will be open to lending further for any upgradation activities too,” he said. Telecom companies have two payment options. They can either make full upfront payment within 10 days of declaration of the final price for the spectrum, or use the deferred payment route. Under the deferred payment route, an upfront payment—of 33% in the case of the 1800 megahertz (MHz) band, and 25% in case of the 900 MHz and 800 MHz bands—of the final bid amount shall be made within 10 days of declaration of successful bidders and final price. Following this, there will be a two-year moratorium on payment of balance amount of the one-time charges for the spectrum, which shall be recovered in 10 equal annual instalments. ​ Pushkaraj Gumaste, managing director, corporate and investment banking, India, at Barclays Plc., said he expects most operators to opt for deferred payments. “The total upfront outlay expected is around $5.5 billion. Based on our estimates, we expect a total financing potential of about $4-$4.5 billion, which will be financed in the form of debt via loans/bonds in with majority of the amount to be raised from the domestic loan/bond markets with the balance raised through the offshore debt capital markets which remain very supportive and robust,” he said. Federal Bank’s Srinivasan said though the pick-up in the credit growth is likely to be gradual, it will add to the total credit growth of banks. “The pick-up will be gradual, maybe only in the third quarter of the next fiscal, because companies will have to follow an elaborate process of creating coal linkages, reworking their business models because the cost structures have changed. So I think it will take at least two quarters for credit growth to pick up but definitely it will be better than the current fiscal,”Federal Bank’s Srinivasan said.

source: http://www.livemint.com