RBI disfavours aviation bailout

Says banks strong enough to tackle the problem on their own

The Reserve Bank of India (RBI) today indicated that it was not in favour of providing a special dispensation for restructuring loans extended to all airlines. At a meeting convened by Finance Minister Pranab Mukhjeee to review the performance of public sector banks, some lenders, led by the State Bank of India, pitched for an industry-wide package on the ground that most civil aviation companies were under stress.

Banks want to restructure the loans and continue to treat them as a standard asset. Under normal circumstances, banks have to set aside a higher amount as provision for restructured assets during the first year. Since banks cannot seek a special dispensation for restructuring the loans of a company, they are pushing for an industry-wide package.

At least four bankers present in the meeting told Business Standard that RBI Deputy Governor Usha Thorat responded to their request by saying that banks could restructure the loans themselves as they were reporting good results.

The government, on its part, appeared to be in favour of the proposal from the lenders. “Banks are worried about non-performing assets (NPAs). Gross NPAs are about 3 per cent of the total assets, which is high. Most NPAs, as a proportion of total advances, are in aviation and not in agriculture,” said an official.

Thorat also told bankers and government officials present in the meeting that RBI will discuss the issue this week and then take a final call on the matter. At the same time, banks were told that they should take a common position on all loans extended to the airlines since not all of it was done by a consortium of lenders.

A fortnight ago, lenders had approached RBI under the aegis of the Indian Banks’ Association seeking a special dispensation for these loans, as was done at the height of the global financial crisis and the consequent slowdown. Though bankers admitted that the problem was essentially with two airlines, Kingfisher and Paramount, they said a special dispensation will make the task simpler. With signs of RBI not favouring the move, two bank chiefs suggested that the regulator could even consider providing a special dispensation for the two airlines.

“The aviation sector is on an uptick but it needs equity to survive. By restructuring some of the loans we can reduce the stress for which regulatory clearance is required,” SBI Chairman OP Bhatt had said on Thursday.

The country’s three biggest carriers — Jet, Kingfisher and government-owned Air India — which control 65 per cent of the domestic passenger traffic have a combined debt of Rs 63,045 crore. Of this, Rs 16,000 crore is in short-term loans.

Banks had finalised a three-pronged strategy to restructure the short-term debt of the airlines. It included a two-year moratorium on payment of short-term debt, lower interest rate and conversion of a part of the debt into external commercial borrowings or cumulative convertible preference shares. Jet has distanced itself from the demand, saying it has already restructured its debt. Bankers said that Air India is also paying its installments on time.