Mumbai: The Reserve Bank of India (RBI) has increased the risk weight on restructured loans for the airline industry, requiring lenders to set aside additional capital to reflect the state of a sector that is weighed down by losses and debt.
The central bank has directed a consortium of banks, led by State Bank of India (SBI), the nation’s largest lender, to assign the loans a risk weight of 150%, increasing it from 100%.
The order has significant implications for the banks. Under current norms, banks in India have to maintain a capital adequacy ratio, expressed as the ratio of capital to risk-weighted assets, of 9%, meaning they have to set aside Rs 9 for every Rs 100 they lend.
Once the risk weight is raised from 100% to 150%, they will have to set aside Rs 13.5 of capital on each Rs 100 they lend, raising the cost of the restructuring exercise for the banks.
In August, RBI gave its go-ahead to SBI to restructure the debt of the airline industry. SBI is leading a 13-bank consortium to restructure the loans of the industry.
SBI has exposure of about Rs 3,000 crore to the airline industry, according to the bank’s chairman O.P. Bhatt.
IDBI Bank Ltd has exposure of Rs 3,500 crore; Bank of India and Bank of Baroda have exposure of around Rs ,000 crore and about Rs 3,500 crore, respectively.
“To reflect the higher element of inherent risk in restructuring of such advances, which are not fully secured, the applicable risk weight would be additional 50 percentage points over and above the regular risk weight applicable to such advances,” said an RBI note, sent to SBI in late August and reviewed by Mint.
This will continue until the airlines are in a position to start repaying their debt.
Under RBI guidelines, the risk weight assigned to any industry is 100%. The risk weight on loans given to the real estate sector was raised amid concerns of an asset bubble forming in 2006, but it was brought down to 100% in November 2008 to help banks tide over the global credit crunch.
In the past, RBI raised the risk weight on banks’ exposure to commercial real estate, capital markets and personal loans, including credit card loans. But that was done on concerns of overheating in some segments of the economy and because RBI wanted to rein in banks’ aggressive lending to these sectors.
This time around, the risk weight has been increased for a different reason—the frail health of the airline industry.
Banks will need to set aside more capital over and above the “sacrifice”—such as a cut in interest rates—that they commit to in restructuring the debt of airlines. This will increase their cost, but a banking analyst with a foreign brokerage said it would not have a “huge impact” on banks.
“It’s not a big amount... It’s always better to make such sacrifices than piling bad assets,” the analyst said. He did not want to be named because he is not authorized to speak to the media.
According to the International Air Transport Association, or Iata, India’s airlines are carrying a combined debt of $13 billion.
The Indian central bank has also asked banks to take tangible assets as collateral from airlines.
“Even if the aircraft being leased in nature are not available as tangible securities, the bankers, in order to safeguard their interests, should ensure that other tangible securities like land, buildings, plant and machinery, shares, receivable etc. of the borrower company or of the group companies are pledged or hypothecated or mortgaged to the banks to the maximum extent possible,” the RBI note said.
It advised banks not to rely too much on intangibles such as personal guarantees and brand value. The outlook for the airline industry looks bright given the improving travel demand, a rebound in the financial position of the carriers and the expected assistance from lenders (primarily banks), according a 20 September report by domestic brokerage ICICI Securities Ltd.
The report said RBI’s green signal for debt restructuring is “a positive development for the sector and will augur well for the airline companies”.
Iata has upgraded its forecast for the airline industry to a profit of $8.9 billion in 2010, up from the $2.5 billion it predicted in June.
“While some of India’s carriers are now reporting profits, the sector as a whole is still expected to post a loss of $400 million. In a market as rich in potential as India, the precarious financial situation indicates that structural weaknesses must be dealt with,” Iata director general and CEO Giovanni Bisignani said at an event hosted by the Confederation of Indian Industry (CII) in New Delhi last week.
Apart from increasing the risk weight, RBI has asked banks to ensure that promoters of airlines bring in fresh equity worth 15% of their sacrifice. It can be done in phases over the next six months.
Vijay Mallya, promoter of Kingfisher Airlines Ltd, has been allowed to bring in interest-free debt in the first phase and convert that into equity in six months.
A Kingfisher Airlines spokesperson did not offer any comment on the RBI conditions.
The debt restructuring is being undertaken at a time when full service carriers such as National Aviation Co. of India Ltd (that runs Air India), Jet Airways (India) Ltd and Kingfisher Airlines have been planning to raise funds to buy planes.
State-run Air India is knocking at the doors of the government for a sovereign guarantee to bring down the cost of working capital loans from domestic banks.
Jet Airways has sought to raise external commercial borrowings to repay expensive rupee loans from domestic banks.
Jet Airways is also looking at raising $400 million through equity offerings while its founder chairman Naresh Goyal has expressed his willingness to dilute his stake by 20% from the current 80%.
In August, Kingfisher Airlines’ board approved a proposal to increase the authorised share capital from Rs 900 crore to Rs 1,650 crore.