Banks want 40 per cent of their short-term loans of around Rs 22,000 crore to the struggling national carrier Air India to be converted into either government-guaranteed bonds or non-convertible debentures.

The reason: interest on these financial instruments can be serviced even if the airline does not earn profits.

They have rejected the proposal by SBI Capital Markets, the investment banker mandated to restructure Air India's loans, to convert 40 per cent of short-term loans into redeemable preference shares.

The RBI was agreeable to the conversion of loans into preference shares, said a banker.

The reason for banks' rejecting the proposal to convert loans into preference shares is that interest can be paid on these shares only if the issuer of shares makes profits.

The balance 60 per cent of the short-term loans is proposed to be converted into long-term loans of 15 years duration and at about 11 per cent interest.

By converting 40 per cent of the short-term loans into bonds or debentures, banks are hoping to make up for the sacrifice (diminution in the fair value of their loan exposure) they are making by extending the tenure of the balance portion of the loans.

“We can at least book some income if a portion of the loans is converted into either bonds or debentures,” said a banker familiar with the developments.

As part of the restructuring proposal, SBI Caps has recommended that Air India's short-term loans that are converted into bonds should get the statutory liquidity ratio (SLR) status.

Though this move could ease the provisioning burden, the RBI is unlikely to agree to this arrangement as the loans given are commercial loans. Banks investments in government securities, issued by the Central as well as State governments, are reckoned as SLR investments.

While there is no escape from provisioning, which requires banks to set aside capital, the RBI is understood to have agreed to allow banks to make provisioning over 20 quarters.

Even as banks are grappling with restructuring short-term loans, they may soon have to square up to deal with medium and long-term loans aggregating about Rs 21,000 crore, said the banker.

Ever since the merger of Indian Airlines with Air India in early last year, the cash-strapped national carrier, among others, has been reeling under a mountain of debt, defaulted on statutory payments, and delayed salaries.

(This article was published on January 20, 2012)
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