The Centre's package of $270 million for Air India is “credit negative” for its Indian lenders, said a report issued by rating agency Moody's.

The report said while the bailout provides temporary relief to Air India creditors, including Indian banks, recurring defaults by the airline imply that Government support may not be timely, which is credit negative for Indian banks.

Banks like State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank, Central Bank of India and Oriental Bank of Commerce are large lenders to Air India and account for nearly 70 per cent of its loan exposures.

NPAs

If Air India were classified as a non-performing asset (NPA), it would be a significant blow to Moody's rated banks as they have lent up to 15 per cent of their core tier-1 capital to the company, said the report.

“It would also stress the banks' already strained profit and core tier 1 capital levels, and worsen the asset-quality indicators. In our estimate, this could increase the system-wide gross percentage of NPA by nearly 100 basis points,” said Moody's.

The bailout has allowed Air India to temporarily ride out a liquidity crisis. It can now pay overdue salaries and interest on bank loans, a respite for Indian banks that have lent nearly $5 billion in working capital loans to the ailing airline.

“We believe that the government has the ability and willingness to support strategically important companies as well as sovereign-owned public-sector enterprises, including banks. But the government has only provided temporary solutions to Air India's financial troubles. Also, the support was delayed and inadequate in our view as the government allowed the airline to delay paying employee salaries and bank interest. This poses concerns and raises doubts over the government's willingness to provide timely support to sovereign-owned public sector enterprises,” the report said.

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