Airline loans get a makeover

Airline loans get a makeover

After allowing banks to brush the non-performing loans in the airlines sector under the carpet, the Reserve Bank of India (RBI) seems to have been seized with pangs of remorse for what it had done. How else can one explain its decision to raise the risk weight on restructured loans to the industry?

First, RBI allows banks to restructure the problem loans to the airline industry, thus enabling them to avoid classifying the debt as bad and doubtful. The banks thus escape making substantial provisions, other than the small amounts they make when a loan is restructured, thereby avoiding a hit to their profits. But then, RBI realizes that these assets are nonetheless dodgy and could go bad. So it now wants banks to keep aside more capital for these restructured loans.

It’s true that this new move does go some way towards recognizing the risks involved in lending further sums to the airlines in trouble. But note that the banks continue to avoid any hit to their profits. It would have been far better if the non-performing assets had been recognized upfront and banks had made adequate provisions for them. Their statements of account would then have provided a true and fair picture of the situation, rather than show a cosmetic improvement.

To be sure, there are extraordinary circumstances in which the corporate debt restructuring mechanism does help. Many of the loans made to the steel industry during the mid-1990s were restructured during the slowdown that followed the Asian crisis, and these loans did turn profitable later. Similar extraordinary circumstances existed in the wake of the collapse of Lehman Brothers.

But now that the economy is supposed to grow by 8.5%, where is the need for further loan restructuring? The singling out of one industry sets an unhealthy precedent. What is to prevent other cyclical and capital-intensive industries, such as shipping or steel, from clamouring for relief next? Or indeed the real estate sector, which is neck-deep in debt?

Nor is it at all certain that the problems of the airline industry are cyclical. Indeed, a look at the airline industry in the US is enough to suggest that this is a sector that could well have a structural problem. And if the industry is merely going through a bad patch and will become healthy soon, surely the prudent course of action for the banks would be to recognize the bad loans, take the hit on their books and then, when better times come, upgrade the loans to the performing category? If RBI had insisted on that course of action, it would not now have to try to make partial amends by having higher risk weights on the restructured loans.

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