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Air India’s recurring default ‘credit negative’ for its banks

Air India’s recurring default ‘credit negative’ for its banks
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First Published: Tue, Aug 09 2011. 01 04 AM IST
Updated: Tue, Aug 09 2011. 01 04 AM IST
Mumbai: Moody’s Investors Service Inc. said Air India Ltd’s recurring default is “credit negative” for the airline’s lenders, including State Bank of India (SBI) and Punjab National Bank.
The state-owned carrier, which is in the midst of a government bailout, was seeking a total equity support of Rs 42,920 crore till fiscal 2021, including guarantees for aircraft loans worth Rs 30,584 crore (both present and future) up to that year. For immediate relief, Air India has also demanded Rs 6,600 crore from the government. Air India had debt of Rs 42,570 crore and accumulated losses of Rs 22,000 crore as of 31 March.
On 4 August, the cabinet committee on economic affairs approved a further equity infusion of Rs 1,200 crore. The carrier has been missing salary payments and defaulting on interest payments in the past three months. The government released Rs 500 crore to ensure interest and salary payments a week ago.
The bailout provides temporary relief to Air India’s creditors, including Indian banks, but recurring defaults by the airline imply that government support may not be timely, which is “credit negative” for Indian banks, Vineet Gupta, vice president-senior analyst at Moody’s, wrote in an 8 August report.
Besides SBI and Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank Ltd, Central Bank of India and Oriental Bank of Commerce are the bigger lenders to Air India, accounting for nearly 70% of its loan exposure.
However, a senior Air India executive denied any such problems for Indian banks.
Air India has submitted a financial restructuring plan to the finance ministry envisaging at least 60% of the total working capital will be converted into a long-term loan and the rest into cumulative preference shares for 15 years. It expects a saving of Rs 1,000 crore a year in interest rates.
“The turnaround and financial restructuring plan submitted by Air India is duly vetted by SBI Caps (Capital Markets) Ltd and Deloitte and is under the active consideration of the ministry of finance, and Air India is confident of getting government of India’s support to these plans,” he said. “SBI Caps has suggested a capital infusion of Rs 6,600 crore in the financial year 2011-12, which would assist the airline in getting ahead with its turnaround plan.”
The government has the ability and willingness to support strategically important companies as well as sovereign-owned public sector enterprises, including banks, “but the government has only provided temporary solutions to Air India’s financial troubles”, Moody’s said.
“Also, the support was delayed and inadequate in our view as the government allowed the airline to delay paying employee salaries and bank interest,” Gupta said. “This poses concerns and raises doubts over the government’s willingness to provide timely support to sovereign-owned public sector enterprises.”
pr.sanjai@livemint.com
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First Published: Tue, Aug 09 2011. 01 04 AM IST