New Delhi: The Reserve Bank of India (RBI) has asked 13 of the country’s top banks to frame a common policy for restructuring debt at airlines to provide relief to the ailing sector.
The regulator has also censured banks for not following prudent norms before lending to airlines and putting themselves in a tight spot. It has recommended that banks take tangible securities as collateral for future loans instead of depending on promoter guarantees and brand value.
The move is likely to provide relief for the debt-laden companies and directly help the country’s three biggest carriers—Jet Airways (India) Ltd, Air India and Kingfisher Airlines Ltd—which together control 65% of domestic passenger traffic and have a combined debt of $13.5 billion (Rs63,045 crore).
RBI wants the banks to form consortiums for restructuring debt instead of providing one-time relief to individual companies, such as Kingfisher Airlines. The Vijay Mallya airline has sought the recast of Rs2,000 crore of debt through SBI Caps.
In an 18 June meeting with executives of the 13 banks, the central bank noted it would be “a moral hazard for RBI to give any regulatory forbearance for any specific company”, according to the minutes of the meeting reviewed by Mint.
According to the minutes of the meeting, RBI observed: “This short-term perspective for restructuring the debts of a company which had negative net worth for the last two years had now pushed the banks into a situation seeking extensive regulatory forbearance.”
“It was made clear that any regulatory consideration of banks’ requests regarding restructuring guidelines can only be for the aviation sector—and not for any airlines in isolation—in view of the difficulties faced and provided the banks came together in a consortium arrangement and took a long-term and holistic view on the restructuring,” according to the minutes.
The banks will form a consortium and draw up debt restructuring proposals for the carriers, starting with Kingfisher, according to the record of the meeting.
Kingfisher’s debt was Rs7,413 crore at the end of December, of which Rs2,099 crore is short term and the rest is long term. SBI had approached the banking regulator with a proposal to restructure the Rs2,000 crore debt.
Other banks such as IDBI have already recalled some of the loans given to Kingfisher six months back due to “non-adherence to the loan covenants like issuance of equity, creation of agreed security, etc.” and not meeting its commitment of “equity infusion of Rs1,000 crore each in 2010 and 2011 by way of GDR/rights issue/promoters infusion but nothing had come in till date”, according to the minutes.
Besides, IDBI has classified the account of Chennai-based carrier Paramount Airways Pvt. Ltd as a non-performing asset.
The central bank’s concern has been heightened by the banks’ view that it will take at least two more years for airlines to recover financially, a sentiment echoed by consulting firm Centre for Asia Pacific Aviation, or Capa.
“Despite the improved environment for the large three airline groups—Air India, Jet Airways/JetLite and Kingfisher—a complete recovery from the turbulence of the last couple of years will still take time, largely due to the stress experienced on their balance sheets,” Capa said in a report last week. “Indian financial institutions have a high exposure to the aviation sector, and a number of banks have approached the government to seek a one-off restructuring of airline debt in order to avoid an increase in non-performing assets.”
Civil aviation minister Praful Patel said the aviation ministry has been pushing for assistance from the finance ministry for the airlines, given the phase they have gone through. He welcomed any central bank move on airline debt.
“It is not a write-off. Every industry goes through a bad phase, some financial restructuring is necessary,” Patel said in an interview on Monday. “It happened in the case of steel and cement (sectors) in the past. It would be desirable for the sector. One of the major beneficiaries would be Air India.”
In October 2008, the government eased the immediate financial concerns of loss-making domestic carriers by allowing them to pay dues of Rs2,962 crore to oil retailers in six equal instalments. That arrangement was brokered at a meeting attended by petroleum minister Murli Deora, Patel, senior officials of both ministries, executives of the oil marketing companies and the airlines, including Kingfisher Airlines chairman Mallya, Jet’s executive director Saroj Dutta and then Air India chief Raghu Menon.
A civil aviation ministry official who did not want to be named said it was up to the airlines to generate more funds through better passenger yields and cost-cutting, instead of seeking government bailouts.
“All we expect is Rs1,200 crore for Air India as equity after restructuring,” this official said. “Another package for the airlines cannot be sought.”
Kingfisher Airlines rose 1.49% to Rs51 and Jet Airways rose 5.78% to Rs596.40 on the Bombay Stock Exchange on Monday, while the benchmark Sensex rose 0.58%.