Mumbai: National carrier Air India has sought approval from the Reserve Bank of India (RBI) to convert a major portion of its Rs18,000 crore of working capital loans into term loans with a moratorium of two to three years on principal repayments as part of a financial restructuring plan.

Air India and SBI Capital Markets Ltd, or SBICaps, an arm of State Bank of India representing a consortium of banks, have approached RBI with the proposal, according to two persons familiar with the development. One of them is a senior banker and the other a senior official at the ministry of civil aviation.

Uttam Sharma/Mint

Air India has accumulated losses of Rs14,000 crore in the last four fiscals and has total debt of Rs40,000 crore, including the Rs18,000 crore of working capital loans. If RBI agrees to the proposal, Air India will be able to reduce the interest rate on its working capital loans to 6-6.5% from 12%, reducing its debt servicing burden.

“Conversion of working capital loans to term loans will make it easier for the airline to repay its debts," said Hatim Broachwala, a research analyst at Mumbai-based Khandwala Securities Ltd. “The restructuring exercise will be positive for banks as it improves the chances of (loan) recovery."

SBICaps, mandated to draw up a debt restructuring plan for the national airline, has sought permission to convert a part of its working capital loans into rupee bonds backed by a sovereign guarantee, which serves as an assurance that the government will repay loans if a borrower is unable to do so, said a senior aviation ministry official, who didn’t want to be named.

SBICaps has also requested RBI to relax norms governing external commercial borrowings (ECBs) to execute the restructuring plan and to enable the airline to repay its working capital loans. At present, companies are not allowed recourse to ECBs for repayment of working capital loans.

Earlier, RBI had cleared the debt restructuring plan of Vijay Mallya’s Kingfisher Airlines Ltd, India’s second largest airline by passengers carried. SBICaps, which was advising Kingfisher on the restructuring, has proposed a nine-year repayment of all loans with a two-year moratorium on principal repayments.

In June, creditors led by SBI approached RBI to recast the ballooning debt of domestic airlines as a special case.

“We’ve also requested RBI to redeploy the unused sovereign guarantee of Air India, which was originally meant for aircraft-related long-term loans, to back working capital loans. Air India has a $2.3 billion (Rs10,235 crore) worth sovereign guarantee unused that can be redeployed towards working capital loans," said the ministry official cited above.

RBI has declined a plea by Jet Airways (India) Ltd to relax ECB norms to help service its working capital loans. Air India, however, is in a better position to avail of a relaxation of ECB norms because a bigger proportion of its working capital loans is denominated in dollars, the official said.

Air India, Jet and Kingfisher have a combined debt of around $13.5 billion, with an annual interest burden well in excess of $1 billion, according to a report by the consulting firm Centre for Asia Pacific Aviation released in June. This consists of about $7.5 billion in debt related to aircraft purchases and $6 billion of working capital and other loans, according to the report.

Union civil aviation minister Praful Patel, at a press conference in Mumbai on Friday, said he was hopeful RBI will clear Air India’s debt recast by November-end. On the same day, Air India chairman and managing director Arvind Jadhav had follow-up meetings with RBI officials to discuss the issue.

After a meeting on Friday to review Air India’s turnaround plan, Patel said the airline will get a Rs1,200 crore equity infusion by November-end which, according to the minister, will help the airline reduce its high-cost debt. The airline has already received a Rs800 crore infusion.

In 2007, Air India ordered 111 aircraft—43 from Airbus SAS and 68 from Boeing Co.—worth a combined $11 billion. It has already raised at least $3 billion in loans to fund the purchase and is currently in the process of raising more money.