Bank recoveries are impacted by the SC Spectrum verdict, while lending to telcos is actually hurt.

Highlights ◾ Spectrum airwaves are a national asset, not a corporate one, according to a Supreme Court decision. ◾ Bank recoveries suffer because spectrum cannot be reorganized or sold while a bank is insolvent. ◾ Reliance Communications and Aircel had poor recoveries and will now completely disappear. ◾ However, banks would now reconsider lending to telecoms more than recoveries because spectrum used to be a significant component of collateral. ◾ Lending to telcos would be negatively impacted, and loan amounts would decrease. The Supreme Court decided last week that spectrum airwaves allotted to telecom firms are a national asset rather than a corporate asset. Spectrum cannot be used as collateral for loans since telcos are unable to list it as an asset, and in the event of a default, creditors will not be able to sell or restructure spectrum airwaves to recoup their money. Since it contradicts the fundamental tenet upon which loans to telcos were granted, this ruling is likely to force the majority of banks to stop granting credit to telcos in the future. First, though, the decision virtually eliminates banks' ability to get any money back from the financially distressed Aircel and Reliance Communications. Lenders may simply advocate for the liquidation procedure now that spectrum cannot be touched. Bank loans totaling just over Rs 60,000 crore that are involved in insolvency processes are at risk. What happened Initially, in 1994, the government used an auction method to assign spectrum airwaves to telecoms for a certain duration. In 2010, the government awarded spectrum to Reliance Communications, Bharti Airtel, Vodafone, Aircel, and other companies in the first modern, comprehensive spectrum auctions. In addition to other assets, telcos pledged spectrum as collateral when they borrowed money from banks. Reliance Communications (RCom), Aircel, and Videocon Telecommunications were some of the major telcos that experienced difficulties and were hauled under IBC by their lenders in 2018 and 2019. Banks considered spectrum as a business asset and utilized it as collateral when lending to telcos. More than Rs 57,000 crore is owed to lenders by RCom, approximately Rs 60,000 crore is owed by Aircel, and Rs 64,000 crore is owed by Videocon under IBC. A resolution plan for Aircel was accepted by the National business Law Tribunal (NCLT) in 2020 by an asset reconstruction business under the IBC; nevertheless, the company was brought up for non-compliance. Spectrum sales were part of the recovery plan. The sale of spectrum before statutory dues were paid was opposed by the Department of Telecommunications. After settling debts owing to the government, the National Company Law Appellate Tribunal (NCLAT) permitted banks to recoup their losses through spectrum sales. The Supreme Court now essentially outlaws the sale of spectrum in any situation. The harm that The banks' expected recovery from the spectrum sale itself were a meager amount with significant haircuts. The banks in the Aircel case were planning to impose an 89 percent haircut on their loans that had fallen into default. RCom also got a high haircut. The NCLAT verdict did, however, allow banks to recoup at least 10–15% of their debts from Aircel and roughly Rs 20,000–30,000 crore from RCom. These now appear exorbitant in light of the potential for liquidation. Lost recoveries, however, won't hurt banks' future earnings. The reason for this is that UV Asset Reconstruction Company Ltd. (UVARCL) purchased a portion of Aircel loans. Bankers also noted that these loans had been fully funded. The impact on future telecom loans would be the actual harm. For financing purposes, bankers will now need to reconsider what collateral they can need from telcos. Most of the collateral used to come from spectrum value. The collateral determined the loan amount as well. Banks are likely to reduce the size of the loans they provide to telcos now that spectrum is not considered an asset. At minimum, a large portion of the financing would be determined solely by cash flows, which would reduce the amount of space available for telco borrowing.