After missing loan payments to multiple state-owned banks, state-owned Mahanagar Telephone Nigam Limited (MTNL) has found itself in a grave financial situation. Union Bank of India, Bank of India, State Bank of India (SBI), Punjab National Bank (PNB), UCO Bank, and other lenders to the telecom behemoth have declined to accept MTNL’s offer to settle only 40% of its outstanding debts, thereby recommending a 60% haircut. This action might have significant effects on MTNL as well as the larger financial sector.
Credits: PSU Watch
The Current Situation: MTNL’s Debt Defaults and Lender Response
MTNL has been struggling financially for some time and recently disclosed that it had defaulted on ₹519 crore in payments to state-owned lenders between June and August 2024. Following this, its debt is expected to be classified as a non-performing asset (NPA) for most of its lenders in the July-September quarter.
Two banks—Union Bank of India and Bank of India—have already categorized MTNL’s debt as an NPA, and other major public sector banks are expected to follow suit soon. Lenders collectively have an exposure of ₹7,925 crore to MTNL, and this figure will require higher provisions as the account transitions into NPA status.
MTNL initially offered to settle 40% of its dues, requesting lenders to take a 60% haircut on their outstanding loans. However, this proposal was firmly rejected by lenders in June. They have signaled willingness to explore alternative options, including restructuring or converting the debt to equity, but a significant haircut has been ruled out as unacceptable.
Credits: CNBCTV 18
Implications for Lenders: Rising Concerns Over Provisions and Financial Health
One of the most immediate concerns for banks is the financial burden of higher provisioning. With MTNL’s debt sliding into the NPA category, state-owned banks will have to set aside more capital to cover potential losses. This could weaken their financial standing, especially for banks with higher exposure to the company. Given that public sector banks are already grappling with substantial bad loans in other sectors, this development adds pressure to their balance sheets.
Moreover, the unwillingness of lenders to accept a haircut reflects the broader challenge in the banking sector: the increasing number of NPAs and the need for stringent debt resolution processes. Granting a haircut to a government-owned entity like MTNL could set a dangerous precedent for other debt-laden companies seeking similar concessions, a concern voiced by multiple banking executives.
The Precedent Factor: Concerns About Future Debt Resolutions
Concerns have been raised by lenders, such as the State Bank of India, that taking a cut from the government-owned MTNL would send the wrong message to the market and create a bad precedent for debt settlement in the future. If a major government agency receives such a big break, it might encourage other struggling businesses to ask for the same kind of treatment. This would tarnish the credibility of banks’ attempts to enforce stringent repayment terms and undermine the discipline necessary for debt restructuring procedures.
Banks have reportedly raised these concerns with the Ministry of Finance, cautioning that a haircut could destabilize the already delicate framework of corporate debt resolution in India. This is especially relevant as the banking sector is still recovering from the previous wave of NPAs in the infrastructure, power, and steel sectors.
The Role of Government Support: Intervention May Be Needed
Many bankers believe that government intervention may be essential to help MTNL meet its debt obligations. The company already has ₹27,740 crore in bonds backed by a sovereign guarantee, insulating part of its liabilities, but its overall financial health remains poor.
The banking sector is hopeful that the government will step in, either through capital infusion or other forms of relief, to help the ailing telecom firm. Given the critical role MTNL plays as a public sector telecom entity, there is a strong argument that the government will need to play a role in preventing its collapse.
However, the scope of such intervention remains unclear. While the government has bailed out public sector entities in the past, it has become increasingly reluctant to do so, preferring instead to push for operational efficiency and privatization in some cases.
