Banks’ wrong flight to safety

Banks’ wrong flight to safety
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First Published: Mon, Jun 28 2010. 08 55 PM IST
Updated: Mon, Jun 28 2010. 08 55 PM IST
Banks appear to be having trouble with the loans they have made to debt-ridden domestic airlines. This threatens to increase the non-performing assets, or bad loans, of banks substantially, given the large amounts lent to the airlines. They are, therefore, running cap in hand to the Reserve Bank of India, asking it to relax the rules so that these advances do not show up as bad loans on their books.
As justification, the banks cite the notoriously cyclical nature of the industry, the fact that airlines have faced a very tough operating environment in the last two years, the capital intensity of the sector and the long time airlines take to break even. They, therefore, have made out a case for restructuring loans to airlines, which could entail lower interest rates, conversion of overdue interest into principal, and other concessions usual in such restructuring packages.
To be sure, there is a case for restructuring when the economy is affected by a crisis. The idea is to give companies some breathing space so that they can take steps to turn around their operations, cut costs and then take advantage of better times to repay the loans. Such an approach also does not burden the banking sector with bad loans during a crisis, so that they can keep lending. To take an example, the steel industry had grossly overextended itself in the mid-1990s by setting up huge capacities, and the Asian crisis hit it very hard. The corporate debt restructuring (CDR) mechanism put in place at that time worked like a charm, helping the industry emerge stronger from the crisis. This time, too, a CDR system is in place and banks have taken full advantage of it.
But a special dispensation for the airline industry would be terribly self-serving. The worst of the crisis is behind us and airlines have started showing better quarterly results. Lending to these airlines was a commercial decision and banks must live with the consequences. Any attempt to camouflage bad loans could only compound the problem. Far better to take the losses, clean up the balance sheet and move ahead. Besides, where will the demand for special dispensations stop? Telecom, ports, airports, shipping are all sectors that are capital-intensive and have long gestation periods. Will banks demand special restructuring packages for them, too?
That said, there is definitely a case for opening up foreign equity investment into the airline sector. It’s also a matter of concern that banks, with their predominantly short-term funding, are being used to fund long-gestation infrastructure projects, leading to maturity mismatches. But restructuring packages are the wrong way to address these issues.
Do airlines deserve debt restructuring packages? Tell us at views@livemint.com
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First Published: Mon, Jun 28 2010. 08 55 PM IST