At Rs 4 lakh crore, banks' exposure to the telecom sector is staggeringly high -- enough to raise eyebrows over concerns regarding the long-term viability of the business. Here is a brief look at how it came to a sad pass.
At Rs 4 lakh crore, banks' exposure to the telecom sector is staggeringly high -- enough to raise eyebrows over concerns regarding the long-term viability of the business. The recent downgrades of Reliance Communications debt is perhaps the first nail in the coffin for the sector, which is finally waking up the idea of consolidation amid strong competition from Reliance Industries-owned Jio.
Here's how the industry ran into a quagmire of debt.
The Factors
Post liberalisation of the economy in 1993, the industry's main turning point came in 2008, when India logged into the 3G craze. Two years later, 3G-enabled mobile and data services were launched, which saw private operators entering the fray with their services. This, forever, changed the consumption patterns of telecom users.
The result was visible. After US and Japan, India boasted the third largest number of Internet users of whom 40 percent use a mobile phone to access the web.
India also ranks as one of the cheapest providers of broadband speed in the world.
The large capital required for the setup of infrastructure and for the right of way on the broadband spectrum, a complicated tariff system and a lack of domestic content were challenges which led to the rise in broadband.
The Spectrum Auctions:
Since 2010, the government has been opening up spectrum on certain frequencies to telecom operators. In FY16, with many of the players in debt, and facing competition, the government raised Rs 65,789.12 crore in revenue, falling short of its estimation. This figure paled in comparison to the Rs 1.1 lakh crore takings from the last auction held in March 2015.
Additionally, the capital expenditure has shot up significantly in the last decade as the operators have been improving the efficiency of their networks as well as accommodating the exponential growth in data consumption.
The entry of Reliance Jio proved to be a disruptive force in the industry. Its free voice and data services, which were offered first in September 2016, caused competitors Bharti Airtel, Vodafone and Idea Cellular to bring down tariffs, leading to a major deflation of prices.
Data packs of up to 2 GB saw prices being slashed by around 67 percent, whereas 1 GB packs saw prices slashed up to 45 percent.
Such pricing measures have raised concerns about mobile data revenue growth in the short-term and long-term sustainability in terms of revenue generation.
According to Telecom Regulatory Authority of India (TRAI) data, broadband subscribers in India at the end of October 2016 stood at 218.42 million. Of that lot, almost 200 million accessed the internet through mobile devices or dongles. Also, almost 75 percent of telecom companies’ revenue comes from voice.
Thus, the rising operational costs, which include the debt undertaken for the spectrum auctions, as well as the deferred payments for such auctions and the slashed tariff rates to remain afloat in the market have kept the operators under high pressure.
While the big leagues have a healthy rainy-day fund to support themselves, smaller telecoms will either have to exit or get absorbed.
The Path Ahead:
The Reserve Bank of India (RBI) on Tuesday said that banks ought to provide a higher provisioning for the telecom sector, beginning from the current quarter. A plan is also in the pipeline to allow the tenure of payable loans owed by telecom players to be extended.
original news HERE.