Airlines stressing out bank assets

Banks have burnt their fingers by lending to the aviation sector, which is under immense pressure due to rising fuel costs, mismanagement and predatory pricing.

The turmoil in the airline sector is beginning to affect the loan books of banks. Kingfisher Airlines is liquidating assets to meet its debt obligations.

Banks have burnt their fingers by lending to this sector, which is under immense pressure due to rising fuel costs, mismanagement and predatory pricing.

According to the Financial Stability Report released recently by the RBI, 10 banks (predominantly public sector banks) accounted for around 86 per cent of the credit to the airline sector.

This indicates the disproportionate share of loans to airlines in the books of few banks.

Air India and Kingfisher are the two major airlines which have seen their loans either restructured or categorised as NPAs.

Bank credit

Kingfisher has borrowings (short- and long-term) of Rs 8,023 crore as of March 2012 with majority of exposure classified as non-performing assets.

While the data is not available for Air India, reports estimate Rs 40,000 crore of loan exposure to Air India (details of the overall debt restructured was not available).

As of March 2012, the share of bank credit to the aviation sector is close to a per cent of the overall bank credit. Non-performing loans from this segment account for more than 4 per cent of the total NPAs of banks. Restructured assets of this sector account for 12 per cent share in the entire restructured universe.

The stressed assets (NPAs and restructured assets) of the aviation sector account for close to 0.9 per cent of the overall stressed assets of the banking sector.

According to RBI data, nearly three-fourths of the top banks’ (loan exposure of more than Rs 1000 crore) loans to the aviation sector are either impaired or restructured.

Public sector banks which have been witnessing higher proportion of restructured loans were among the top banks to have exposure to airline companies, particularly Air-India.

Restructured loans

The banks with higher proportion of aviation loans as restructured loans include Oriental Bank of Commerce (17 per cent), Bank of Baroda (16 per cent), PNB (12 per cent) and IOB (11 per cent). Around 10 public sector banks (which have disclosed their restructured aviation loans) had outstanding restructured assets worth Rs 15,800 crore.

SBI, for instance, had Rs 1,216 crore of restructured and another Rs 1,361 crore worth of loans classified as NPAs. PNB had cumulatively restructured Rs 3204 crore of loans to aviation sector as of March 2012.

Bank of Baroda, Central Bank of India, OBC and IDBI Bank have Rs 2400 crore, Rs 1800 crore, Rs 1615 crore and Rs 1474 crore worth restructured loans respectively.

While large proportion of loans are restructured, banks can get back some of their loans to Kingfisher by liquidating the company’s assets.

Government guarantee in the case of Air India also reduces the non-recovery risk.

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