New Delhi: Air India Ltd will raise 500 crore in debt to meet working capital needs and pay interest on its outstanding loans, a senior official at the state-run carrier said on Wednesday.

Air India will soon issue a tender to raise 500 crore from domestic banks," said the official who didn’t want to be named.

The latest fundraiser will exhaust the sovereign guarantee limit of 2,000 crore offered by the government to the loss-making airline, the official said.

Air India had in August raised 1,500 crore from Bank of Baroda under a sovereign guarantee to service bank loans and dues of international vendors, including leasing companies.

The latest fund-raising follows a failed government attempt to privatize Air India to stem the flow of public funds into running the airline.

Civil aviation secretary Rajiv Nayan Choubey on Tuesday said the government has agreed to make a fresh equity infusion in Air India and also provide a sovereign guarantee.

“At the moment, we are borrowing from domestic banks as it doesn’t make sense to borrow from international lenders due to the value erosion of the rupee (against the dollar)," the official said.

Air India also used the 1,500 crore debt raised in August to “normalize debt accounts", some of which were in danger of turning into non-performing assets, the official said.

In 2012, the central government approved a turnaround plan, along with a financial restructuring plan, for Air India. It included converting about 11,000 crore of the airline’s working capital into long-term loans with a consortium of 19 banks, which has to be repaid by the airline by 2021.

“The airline has earlier delayed payments but never defaulted," the official said. “But under the new RBI (Reserve Bank of India) circular that was released in February 2018, the airline had to service interest and regularize the accounts by August-end. A part of the debt raised from Bank of Baroda in August was used for this purpose," the official added.

Air India has a net debt of about 55,000 crore, including about 21,000-22,000 crore of aircraft debt, the official said. “We are hoping to repay the aircraft debt fully by 2021." The carrier took on the loans to pay for new planes from Boeing and Airbus.