Timely payment of fuel bills would spare Air India LIC's bailout

Most banks to which AI owes money are public banks saddled with astronomical NPAs

The Life Insurance Corporation of India (LIC) is planning to take over a portion of the Rs 50,000 crore debt of Air India and convert it into low interest loans, reports suggested. This, according to reports, is being done to reduce the interest burden on AI's huge debt and make it profitable in the next decade.

LIC's plan to convert Air India's 10 per cent interest loans to 7 per cent loans would come as a breather for India's national airline which has been battling losses and mismanagement. But a closer look at the financial information of Air India reveals that involving LIC would not only amount to juggling money within the government, but could also hit public banks hard. 

Most of the banks to which AI owes money are public banks saddled with astronomical Non-Performing Assets (NPAs). Many of them have posted losses this year.

Air India owes the most amount of money to Bank of India. Including interest, its outstanding long term dues to Bank of India at the time when the UPA-2 government was ousted from power stood at Rs 1,640 crore. In addition, short term borrowings to meet operational expenses added up to another Rs 1,000 crore. Ironically, Bank of India posted a loss of over Rs 6,000 crore this year, the highest by any public sector bank. 

The government’s decision to transfer this loan to LIC at a lower rate of interest militates against the objective of making Air India operationally efficient in a bid to increase its profitability. This also deprives Bank of India of valuable interest income that is necessary for the bank’s survival in the near future.

Bank of Baroda (BoB) and Punjab National Bank (PNB) have owed more than Rs 1,700 crore and Rs 1,600 crore respectively by Air India. BoB and PNB had reported losses of Rs 5,400 crore and Rs 4,000 crore this financial year respectively.

Air India’s finance costs are nothing compared to its operational inefficiency. The total amount of interest the national carrier paid on all its loans stood at almost Rs 3,500 crore in 2013-14. However the airline paid roughly one-tenth of this amount or almost Rs 300 crore as delayed payment charges to fuel companies. 

According to reports, this is exactly the amount that the government wants to reduce from Air India's debt every year by making LIC take over the loans at a lower rate of interest. So if Air India were to take just one simple step – pay fuel companies on time – there would be no need for a discounted LIC loan.