Tuesday, March 21, 2017

Too bad Air India: FinMin pours cold water on SPVs for bad loans

The finance ministry is unlikely to sign on to the proposal for a ‘bad (debt) bank’, going by its response to some of the line ministries on similar proposals. The latest of those is the one to form a special purpose vehicle (SPV) to house Air India’s (AI’s) debt.

The finance ministry argues that debt of any entity must largely be serviced from its own resources, instead of expecting the government to pay for these. While the government is AI’s owner, the suggestion for it to take a haircut on behalf of the airline does not find favour.

has proposed to house a major portion of its Rs 45,000 crore of debt in an SPV, to cleanse its balance sheet. A third of the loans were raised to finance the cost of aircraft acquisition; the rest are for working capital. The loan overhang and the cost of servicing it at Rs4,000 crore a year cripples the airlines’ ability to set aside money for investment in route expansion or upgrading of services. The proposal is leant to have got the support of the civil aviation ministry.


Finance ministry officers have made their position clear through informal discussions with the aviation ministry. The ministry has said such bailouts will create a precedent for other stressed entities. AI is running a large operation and the ministry feels there is enough room for it to clear out its debt.

AI’s proposal is similar to the one suggested for public sector banks to house their bad debts. HDFC Chairman, Deepak Parekh and Chief Economic Advisor Arvind Subramanian have also supported the setting up of one or more ‘bad banks’, to pull out non-performing loans from state-owned lenders. Subramanian has used the term ‘twin balance sheet problem’ to describe the issue. The bad debts cripple the ability of these banks to commit fresh credit to companies, while the companies which have run up the debt, starved of fresh investments, are unable to raise resources to service the debt.
20/03/17 Subhomoy Bhattacharjee/Business Standard

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