Airline debt recast hinges on RBI cues

The debt restructuring of domestic carriers Kingfisher Airlines and Paramount could be delayed, as banks have decided to approach Reserve Bank of India for fresh sweeteners.

Bankers said that in response to an earlier request, RBI had allowed a second debt restructuring for aviation companies.

But the package does not address the issue of provisioning -- a key element to the plan.

Whenever the interest rate on a loan is reset or the tenure is extended to soften terms for a borrower, banks have to treat the arrangement as restructuring.

This requires higher provisioning. Banks now want RBI to allow them to treat the restructured aviation loans as a standard asset, which requires lower provisioning.

They had cited the example of the real estate sector and the special dispensation given at the height of the financial crisis to argue their case.

The banking regulator, however, allowed only a marginal relaxation in provisioning.

Bankers said the benefit of a second restructuring would only be available to a few lenders, as most had not yet reworked the terms of earlier loans. "This is hardly a benefit.

We will wait until we get an exemption from higher provisioning," said the head of a public sector bank.

Another banker said lenders would take up the issue with RBI again.

While there is no consortium arrangement in lending to airlines, most large banks have an exposure to Air India, Kingfisher and Jet.

The restructuring will be particularly crucial for Kingfisher.

The promoters of Paramount, on the other hand, are looking to repay the airline's debt from accruals from other group companies.

In the case of Kingfisher, the proposal includes allowing a two-year moratorium on short-term debt, lowering the interest rate and converting part of the domestic debt into external commercial borrowings or cumulative convertible preference shares.

The airline had a combined debt of Rs 7,413 crore (Rs 74.13 billion) at the end of December 2009. It posted losses of Rs 1,647 crore (Rs 16.47 billion) at the end of March 2010.

When the proposal for industry-wide debt restructuring was last sent to RBI, central bank Deputy Governor Usha Thorat had told a gathering of bank chiefs and government officials that bank balance sheets were looking healthy enough for them to meet the burden of higher provisioning.

Soon after, RBI had allowed banks to go for a second restructuring.