Lenders have decided to support aviation sector: BoI

Source : Money Control :WED,18 Jan 2012:CNBC-TV18 

In an interview with CNBC-TV18, N Seshadri, ED ofBank of India says lenders have decided to support the ailing aviation sector. He says banks will not convert debt into equity as of now. "The equity infusion important for airlines will be supported by lenders," he added.

Below is an edited transcript of Seshadri's interview on CNBC-TV18. Also watch the accompanying video.

Q: Could you walk us through what transpired in that lenders meet with Kingfisher Airlines  and whether indeed a decision has been taken in order to infuse fresh capital into the company?

A: I will not be able to give you client-specific details but I can definitely talk about the overall sector that we discussed. It is not a secret that aviation sector is very capital intensive. Most of the Indian carriers do require a huge dose of equity.

As lenders, as a group, we will definitely support aviation sector because it is a very important segment of the infrastructure. There is definitely a need to have higher exposure provided the normal lending norms in terms of equity, servicing of debts and sustainable business model is in place.

From that point of view, it is a welcome decision that we have seen that higher FDI has been thought of for the sector. This will give an additional advantage to these companies.

Q: What transpired at that meeting? What was the collective decision for the public sector and the private sector banks? That they would extend a bigger line of credit to the sector, maybe even think of pumping some more equity into the airlines, which needed it? What is the course of action?

A: Equity cannot be coming in from the lenders when banks are basically on the debt side. It is the responsibility of the airlines to bring in the equity, so that the normal debt-equity pattern, seen in any commercial operations, is maintained. The banks definitely are not in fact agreeing to conversion of the debt into equity because that is not our business.

As long as the normal equity is coming in, the banks would definitely support aviation sector in general. Kingfisher and Air India are all large airlines, which need to really fill in the infrastructure gap. We will definitely support (the companies). That is the consensus emerged in the lenders meeting.

Q: So any further extension of lines of further credit to the aviation sector, would it be a precondition for the promoters to bring in some equity? Was that discussed at the meeting or you are not doing it as a condition?

A: That is absolutely right. Infusion of equity and a sustainable business model way, the debt can be serviced today, tomorrow and day after. It is very important and you need to have parity. Banks definitely are not going to take in fact equity exposure by way of compulsion. So it should definitely come as an equity infusion by the promoter companies or promoter groups.

Q: Was there any affirmation to that regard though from the promoter groups? We believe the heads of the aviation companies were also attending that meeting. Was there an affirmation on how soon that kind of equity infusion would come into the companies?

A: They have always been in appreciative of their stand and it is not unreasonable stand. The only issue which came up was about the timing of the equity issue. That we can workout as it is and that is not an issue. As long as equity infusion is accepted, which is what in fact was made very forcefully from the lenders, and the promoters appear to have been understood that it is important that equity infusion is necessary for them to really be supported by the lender.

Q: Interestingly, yesterday the SBI Chairman said, with regards to Air India, that some other option will have to be considered. They were not happy with what had been put forward in terms of a debt restructuring package. Candidly, are banks getting to the end of their patience with aviation companies and the lines of credit drawn to them?

A: In such case, there is nothing like patience or impatience. It is a business that you have to basically look to it. There is a constant dialogue which in fact we entered into between the lenders and the borrowers. Be it Air India or Kingfisher, the point is same. There must be equity infusion. The promoter's equity should come in.

In fact, lenders would definitely look to any restructuring package. The present package did not find favour basically because it heavily tilted towards the lenders getting into the equity position, which in particular was not acceptable to the lenders.

Q: Some of these accounts are already classified as NPAs in your books now for the public sector banks given the norms. Do you think its prudent banking practice for you to be extending more lines of credit to them or are you doing it because you are forced to because you do not have the option of letting the airline go down with such large exposure to it?

A: Let me tell you very clearly. Banks, especially public sector banks, don't look to one-off relationships. There is a business model, which they have financed. Definitely sectoral elements also play an important a factor. We know for sure that there are external factors like fuel costs, economy slowdown - all have affected.

We are perfectly happy to really revisit those as long as the normal norms in terms of equity, debt and business plan and a viable model are in place. There is absolutely a commercial decision, which banks or lenders as a group, have been taking and there cannot be any pressure on this issue in terms of supporting.

But definitely, we do take into account that airlines are very important part of the infrastructure provision. It is the banking sector and we need to support them. It may not be a compulsion but we will definitely have to in fact pass through the accounting norms in terms of recognition of the asset. If it becomes NPA, Kingfisher mind you in fact became NPA and it was subsequently upgraded on account of restructuring. That can happen to any other borrower.

The way we should look to is any business can have problems and if it is necessary to basically make provision, we make provisions but we are sure we will support then because we take a long term view of any group, more so on a cyclical aviation which is very important from the infrastructure point of view.