The condition of Vodafone-Idea Ltd. (VIL) shows no sign of improvement, and its survival remains uncertain. With total gross debt at an estimated Rs. 1.8 lakh crores as of 31 March 2021, the Government of India and several PSU banks stand to take a massive loss.
Eight top banks of the country have high exposure to VIL. SBI has the largest share of this exposure while IDFC First Bank, YES Bank and IndusInd Bank top the list of exposure percentages to book.
Impact of Losses for Banks
SBI has a total exposure of around Rs. 11,000 crores, constituting 0.5% of its loan book. On the other hand, IDFC First Bank has an exposure of Rs. 3240 crores, which constitutes 3% of its loan book. According to the Nomura report, other banks making losses include:
- YES Bank (Rs. 4000 crores/2.4% of their book)
- PNB (Rs. 3000 crores/0.5% of the loan book)
- Axis Bank (Rs. 1300 crores/0.2% of their book)
- ICICI Bank (Rs. 1700 crores/0.2% of their loan book)
- HDFC Bank (Rs. 1000 crores/0.1% of the book)
Though SBI has the highest exposure, larger banks may not worry much as it’s not too high as a percentage of their books. Additionally, these banks have very robust balance sheet sizes and have already started preparing for the losses for some time. As a result, they are likely to absorb the hit. However, smaller and mid-size banks could have some issues.
IDFC First Bank and YES Bank have the largest material exposure at 3% and 2.4% of their books, respectively. IDFC First Bank has, therefore, marked the account of VIL as stressed and made provisions worth Rs. 487 crores (15%) against a total outstanding exposure of Rs. 3244 crores.
According to PNB, their exposure is not too high to impact the balance sheet. Moreover, all of these banks had the VIL risk exposure on their minds for the past two years, and many of them have managed to prepare for it.
In addition, the banks had issued guarantees to VIL against only a certain portion of current liabilities. The gross non-funded exposure of all banks stands at Rs. 23700 crores (Rs. 237 billion) compared to Rs. 92300 crores of total spectrum payment obligations. Thus, the exposure has already been reported to be ‘below investment grade’ across banks.
Now let’s discuss how the current situation came to be.
Vodafone-Idea Merger and the Subsequent Crisis
In 2018, the two major telecom operators in India- Vodafone and Idea Cellular merged into Vodafone Idea Ltd. The UK based Vodafone had a 45% stake in the company while Idea Cellular, a subsidiary of ABG (Aditya Birla Group), had just over 27% share.
The merger was announced in 2017 to combat the rising dominance of the newly emerged Reliance Jio, which had taken the telecom market by storm in 2016.
However, it could not keep pace with the competition of Reliance Jio’s aggressive pricing and, as a result, kept losing subscribers. This is evident from the poor company results; VIL never reported a quarterly profit after the merger.
The losses kept on piling as over 50 million subscribers left the telecom, and the situation was made even worse with the Covid-19 pandemic.
Heading Toward Bankruptcy
Vodafone had accumulated AGR (adjusted gross revenue dues) to the tune of Rs. 58000 crores. They challenged the DoT’s orders to pay them in court and lost, gaining only a little time to pay the pending amount.
It also piled huge debts and deferred spectrum charges.
To make matters worse, the telecom firm was not able to raise any capital. As Vodafone Idea accumulated a negative net worth of Rs. 44000 crores, ABG chairman, wrote to the government to give up his stake in VIL.
Moreover, both the parent groups have ruled out capital infusion to the ailing telecom.
What Does this Mean for the Future?
The company is headed towards bankruptcy without immediate relief measures or adequate fundraising. No new investors are willing to invest in the telecom company leading to an ‘irretrievable point of collapse’ unless actively supported by the government.
Most experts analysing the telecom company have stated that the company will not be able to honour repayments due in 2022 in the current scenario.
The company’s share prices have declined rapidly, and most analysts are not optimistic about its future prospects. However, many brokerages are maintaining a ‘sell’ rating for the telecom company’s shares to help the stressed investors. Unless the company gets rescued by the government, it’s fair to say that there’s little scope of improvement for current investors.
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Frequently Answered Questions
- How much debt does Vodafone-Idea owe?
As of 31 March 2021, Vodafone Idea Ltd. (VIL) owes a total debt of Rs. 1,80,310 crores. Of these dues, Rs. 1.6 lakh crores in spectrum payments and AGR is owed to the government and Rs. 23000 crores to banks.
- How are banks going to be affected by this loss?
Larger banks would not have much to worry about as the debt exposure is not very high compared to their loan book. Smaller banks like YES Bank and IDFC First Bank may have some issues due to the high exposure. However, this has already been reported as ‘below investment grade’ exposure by banks, so there might not be any cause for worries.
- What is the status of the Vodafone Idea as of right now?
Most experts expect that the company will go down the bankruptcy route unless it gets rescued by the government.