Mumbai: India’s banking industry led by State Bank of India (SBI), the nation’s largest lender, wants to recast the ballooning debt of domestic airlines, throwing the ailing carriers a lifeline while protecting its own loans from turning sour.
The three large airline groups—Air India, Jet Airways (India) Ltd and Kingfisher Airlines Ltd—have a combined debt of around $10 billion (Rs46,500 crore today), according to a report by the consulting firm Centre for Asia Pacific Aviation (Capa) released in December.
Banks need to set aside money to cover bad debts, denting their profitability. A recast of the loans would forestall the need for banks to make such provisions.
“Banks have sought a special dispensation package for the loans granted to beleaguered airlines, citing poor financial health, capital intensity of the sector and long gestation period (in breaking even or turning profitable),” said a senior Mumbai-based banker whose organization has lent to airlines.
The request for a special dispensation followed the Reserve Bank of India (RBI) rejecting a proposal by SBI to recast a loan of around Rs2,000 crore given to Kingfisher Airlines, the second largest carrier by passengers carried, according to a second banker. Kingfisher Airlines reported a net loss of Rs1,647.22 crore for the fiscal ended March.
Both bankers declined to be named, citing client confidentiality.
“The Reserve Bank has turned down the SBI proposal to give special dispensation to Kingfisher Airlines alone. Following this, SBI and SBI Capital Markets Ltd, its merchant banking arm, have presented a case for an industry-wide dispensation,” said the second banker.
The banking industry is citing the inability of the debt-laden airlines to service loans. Indian carriers incurred a collective loss of $2 billion in fiscal 2009, the same as in 2008.
SBI Capital Markets is overseeing Kingfisher Airlines’ loan recast. National Aviation Co. of India Ltd, or Nacil, that runs Air India, is also in talks with SBI Capital Markets for a similar loan restructuring.
Executives at Kingfisher Airlines were not available at the weekend to comment for this story. RBI did not respond to an email.
Kingfisher Airlines had Rs7,413 crore of debt on its books at the end of December. Jet Airways had debt of Rs13,759.50 crore as of 31 March. National carrier Air India’s debt exposure was Rs17,000 crore in May.
The Capa report said the airlines will require to raise $10-12 billion of capital over the next two-three years to finance aircraft deliveries.
“It is well known that the airline industry is a brutal industry. Particularly during a downturn, airline profits nosedive. In the last two years, both globally and domestically, the appetite for investment in the airline industry has been weak,” said Rishikesha T. Krishnan, professor of corporate strategy at the Indian Institute of Management, Bangalore, who tracks the sector.
An SBI-led consortium of banks lent around Rs2,000 crore to Kingfisher Airlines. The other banks in the consortium are Bank of India, Bank of Baroda and Punjab National Bank. The loan has been restructured once by the banks, but the airline was unable to service it even after that revamp, one of the bankers cited above said.
Troubled loans are usually referred to the corporate debt restructuring (CDR) cell of the creditor banks after a majority of them approve a recast, which could entail a lower interest rate, longer repayment period, or the conversion of overdue interest into principal part of the loan. This is done after a loan turns bad.
SBI’s original plan was to recast the Kingfisher Airlines loan outside the CDR platform because if it is classified as an non-performing asset, the airline may find it difficult to raise money through a proposed global equity offering. Kingfisher Airlines plans to raise up to $350 million by selling equity instruments on the domestic and international market starting in the second quarter of the current fiscal.
“In the absence of bank finance, airlines will have to look for capital infusion. Some airlines, particularly those from the Middle East, would be keen to invest if the government’s restriction on FDI (foreign direct investment) from airlines were to be relaxed,” Krishnan said.
Foreign airlines are not allowed to buy stakes in domestic carriers under current Indian regulations.