Banks worried over Air India divestment route

Lenders say hiving national carrier's working capital debt puts their exposure at risk

Lenders to Air India have expressed concern over the government’s plan to transfer the national carrier’s working capital debt to a separate subsidiary to make the state-owned airline attractive to buyers. Lenders worry that a move to sell aviation assets, including planes, before clearing the debt could make their exposure vulnerable.

The government proposes to transfer Air India’s working capital loans, short-term loans, and non-aviation assets to a separate company, readying the airline for prospective buyers, according to government officials. 

At the end of FY2016-17, Air India’s debt stood at Rs 48,876 crore. Of that, a significant portion (Rs 31,517 crore) is on account of working capital, while the rest would be aircraft loans. The lenders’ forum, civil aviation ministry, and the Department of Investment and Public Asset Management (Dipam) have had a series of discussions on the matter.

“We have expressed our concern to the government. We want a guarantee from the government over the working capital part of the loan,” said an executive of a bank which gave loans to Air India. The lenders’ forum consists of 25 banks, including state-owned and private banks. The loans were extended to the ailing carrier, backed by a sovereign guarantee.

According to a turnaround plan approved by the government in 2012, the lenders’ forum had agreed to restructure the debt which was then pegged at Rs 18,000 crore, apart from a fresh cash infusion of Rs 30,231 crore till FY2020-21.

Senior government officials however, argued this was the best possible way to go ahead with the sale of the company and that both the buyer and the government would gain from it. “We believe that the proceeds from Air India’s sale will be enough to pay off the banks. This is not a write off; the banks will definitely be paid back,” said the official, adding the proceeds from monetising real estate will also be used for payouts. “If the proceeds from sale are not enough to pay the banks, we will consider floating bonds to clear the debt,” the official said. Civil Aviation Secretary Rajiv Nayan Choubey refused to comment on the matter, while queries sent to Dipam did not elicit any response. A senior Air India official involved in the disinvestment process said internal calculations confirm that the debt-to-asset ratio is very low. 

Debt-to-asset ratio defines the total amount of debt relative to assets. A lower value indicates less leverage and lower risk. “Air India’s assets, valued at current market price, are almost at around Rs 25,000 crore. This means most of the debt is sustainable if leveraged at true potential,” the official said.