Air India debt recast eludes banks

Air India's debt recast plan has hit a deadlock with both the national carrier and banks continuing to stick to their stand even as the regulator has disapproved providing dispensation, thus only compounding the problem.

Following the rejection of initial debt recast plan, SBI Caps -- the merchant banking arm of State Bank of India which has the mandate of finalising the plan -- had prepared four alternatives, and sought views from banks.

All the banks agreed that the most preferred option would be to convert the debt into bonds which can be used for calculating the statutory liquidity ratio (SLR).

Even so, bonds to have SLR status would require the approval of the Reserve Bank of India. Banks preferred this option, as they will not have to take any hit in terms of provisioning, unlike the other alternatives of converting the debt into preference shares or to long-term loans.

The central bank, however, had turned down the proposal to give SLR status to bonds on the ground that it would set a wrong precedent.

At this, bankers sought a timely resolution to the imbroglio, lest their entire exposure would slip into non-performing loan category. It would lead to high provisioning that can be the bottomline of banks.

With rating agencies already raising a red flag on Indian banks due to rise in bad loans, such a huge amount becoming a non-performing asset (NPA)

would leave banks to face with a rating downgrade.

According to rough estimates, if AI loan turns, it will lead to a 1 per cent increase in gross NPA of the Indian banking sector. The gross NPA ratio for the banking sector was at 2.25 per cent in 2010-11. This was lower as compared to the previous year, though it had increased in absolute terms.

In October last year, Moody's Investors Service downgraded SBI's financial strength rating based on the banking entity's capital situation and deteriorating asset quality.

While the RBI rejected the idea of allowing bonds to have SLR status, it also said it might consider giving some leeway in terms of provisioning if the short-term loans were converted to long-term.

Banks have to make provisioning if the loans are treated as long term, and interest rate is reduced as the net present value of the loan will fall. While banks are required to make upfront provisioning, RBI said the amount could be amortised over a time.

For the Rs 43,000-crore (Rs 430-billion) debt of Air India, there is a proposal to restructure by spending Rs 22,500 crore (Rs 225 billion). A consortium of 26 lenders, with State Bank of India as the lead bank, has exposure to the troubled airline.