2G licence cancellation to hit banks' profits: Fitch

Global ratings agency Fitch on Friday said the Supreme Court's decision to cancel 122 telecom licences will hit the profitability of banks that had extended credit to these companies by up to 10 per cent.

"Assuming a conservative level of write-offs on these loans, we believe that banks' credit quality will not be materially weakened, but that annual profits could fall by up to 10 per cent," it said in a report.

According to Fitch, Indian banks' exposure to the telecom companies that are  losing 2G licences is around 0.6 per cent of their total loans.

"However, around half of the exposure is in the form of financial guarantees toward future payments of licence fees. State Bank of India has confirmed that once the licences are cancelled, those guarantees should no longer be in force," it said.

"In total... the volume of loans that are affected by the licence cancellations may be less than 0.2 per cent of the sector's total loan book," Fitch added.

In a report, the agency added that the banking sector should be able to absorb loan-losses on account of the cancellation of licences without it having a major effect on their credit profile.

"The Indian banking sector should be able to absorb loan-losses stemming from the cancellation of second-generation mobile licences without materially impairing credit quality, though Fitch Ratings believes annual profits will still take a hit," it further said.

According to the agency, while the impact of the Supreme Court's decision is limited, the cancellation of the 2G licences highlights the Indian banks' exposure to infrastructure, a sector which continues to face high regulatory and execution risks.