Money & Banking

With 2G loans under lens, banks re-think infra lending

Our Bureau Mumbai | Updated on November 12, 2017 Published on January 21, 2011

RBI intervention sought to ensure credit flow is not affected

Infrastructure project funding, especially for telecom, power and roads, from banks may become hard to come by as the very basis for extending loans to companies to procure second generation (2G) licences has come under the scanner of the investigating agencies, say bankers.

Given that the Government was the authority for issuing 2G licences and the licence was one of the key criteria for extending loans to successful bidders, bankers wonder if they can rely on such licences (notwithstanding the Government's stamp of approval) to give loans.

All norms followed

“How are we to know that telecom licences have been obtained in an irregular manner? What better security could we have sought from debtor companies than government-approved 2G licences? Recent developments in the telecom sector vis-à-vis 2G licensing are very discouraging. We will now have to think twice before sanctioning loans to infrastructure projects, even if government clearances are in place,” said a public sector bank official.

Besides licence/government permission, the other key criteria that are considered for sanctioning infrastructure loans are: future cash flows to service the bank loan, the future growth potential in the sector and promoter's ability to execute the project and fund cost overruns in case of delay.

Bankers said they had followed all norms and procedures for granting loans to companies against 2G licences. Loans were given not just against the licence but after evaluating the business models of each licensee.

Telecom licences are assigned to the lender based on the tripartite agreement entered among lenders, licensor and the licensee. This gives the right to lenders in case of default to replace the licensee with the consent of the licensor, they said.

The dim view being taken by public sector bank officials, handling credit administration, of the probe launched by investigating agencies into loans given to successful bidders of 2G licences could lead to a slowdown in credit to infrastructure projects, feel analysts. In the April-September 2010 period, banks lent a whopping Rs 87,499 crore, compared with Rs 48,659 crore in the corresponding period last year.

“Mobile telephony has grown in the country not just because operators were granted licences. It is because lenders bank-rolled these operators' pan-India roll-out. Financing by banks in the case of infrastructure projects is not based on assets but based on cash flows,” said a bank official.

The Supreme Court had come down heavily on public sector banks for their role in the 2G spectrum scam in December. It observed that massive amounts were lent by some public sector banks to the 2G licensees and it must be investigated.

Banks, according to the preliminary enquiry registered recently by the Central Bureau of Investigation, provided loans aggregating over Rs 11,500 crore to two real-estate companies, which entered the telecom space, by completely ignoring the risk factors. The banks that have been mentioned in the enquiry include SBI, PNB, Canara Bank, Central Bank of India, Allahabad Bank, Corporation Bank and IDBI Bank.

Banks have sought the Reserve Bank of India's intervention to take up the matter with the Government to ensure that credit to the infrastructure sector is not stalled.

The issue was also discussed at the recent pre-credit policy meeting bankers had with RBI .

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Published on January 21, 2011
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