Government Cannot Allow MTNL To Default; It Could Queer Pitch For Other PSUs That Need Bank Funds

The Union government appears to be hesitating on paying up the dues owed to banks which have lent money to Mahanagar Telephone Nigam Limited (MTNL), the bankrupt, government-owned telephone services provider with franchises in Mumbai and Delhi.

A few days ago, CNBC TV18 reported that MTNL had defaulted on its loan repayments to banks, and had asked banks to take a 60 per cent haircut — meaning it will pay only 40 per cent of its dues. Its lenders, mostly state-owned banks, stoutly declined.

Bank of India and Union Bank have already classified MTNL’s dues as non-performing assets, and the rest, including Punjab National Bank, State Bank of India, Punjab and Sind Bank, and Uco Bank, may follow suit in the July-September quarter, results for which are due in October.

It is difficult to understand why MTNL even proposed such a haircut, and that too to government-owned banks, unless it got a nudge from its nodal ministry to test the waters. Any writeoff by a government-owned bank to a government-owned company would amount to a net transfer of resources from profitable banks to loss-making MTNL. 

But this isn’t the real problem. If the government really intended to allow a quasi-sovereign company to default, it would have sent shivers down the spines of public sector banks. While MTNL’s loans were not given any sovereign guarantees, any denial of government help to repay loans and interest would have been interpreted by the markets as akin to a sovereign default. Reason: MTNL did not get these loans because it was a robust and viable company. It got them because there was an implicit government guarantee. 

It would have been another matter if the government’s holdings were below 50 per cent, but that is not the case. MTNL is 56 per cent government-owned. It has a market valuation of around Rs 3,500 crore, but that has nothing to do with its business potential.

According to an Economic Times report, MTNL has missed Rs 518 crore in principal and interest payments on borrowings of just under Rs 8,000 crore, but its financial indebtedness is as high as Rs 32,000 crore — 10 times its market valuation.

Clearly, the government does not think MTNL, as a corporate entity, can be salvaged, and a Mint report in July said the government will not merge MTNL with Bharat Sanchar Nigam Limited. Instead, it may merely ask the latter to run the telecom operations of MTNL. But MTNL has been losing subscribers, and as in June 2024, Telecom Regulatory Authority of India data showed it had just 2.14 million subscribers left.

The government, says another Economic Times report, has agreed to pay up the interest owed by MTNL, and that is a good thing. The issue is not whether MTNL is salvageable or not. The issue is the credibility of implicit sovereign guarantees. If banks are left holding the baby when a public sector company defaults, it does not send a healthy message to the markets.

MTNL is not technically a sovereign default, but any failure on the part of the government to honour its debts will make financing of other public sector entities more difficult. MTNL cannot be allowed to default.