Lenders to Air India have rejected the debt restructuring proposal of the troubled national carrier on the ground the plan would hurt profitability and erode capital.
The decision was taken at the State Bank of India headquarters in Mumbai on Monday when the top managements of the lenders met.
The meeting was convened by SBI.
The consortium has 26 banks and is led by SBI.
IDBI and Bank of Baroda are the others in the consortium with exposure to the loss-making carrier.
Bankers present in the meeting said it was agreed the debt recast proposal prepared by SBI Caps -- the investment banking subsidiary of SBI -- would result in a Rs 10,000 crore (Rs 100 billion) hole in the banks' balance sheets.
Bankers said SBI Caps would get back with a fresh proposal for the AI debt recast.
As an alternative to the present proposal, banks have suggested their exposure be treated as loans, and not preference shares, as was earlier suggested by SBI Caps.
According to the present debt recast plan, banks will restructure AI's loans worth Rs 22,000 crore (Rs 220 billion).
It was proposed 60 per cent of the loans be converted into long-term loans to be repaid over 15 years and the balance be converted into cumulative redeemable preference shares with an eight per cent dividend.
According to the law, a company can pay dividend only if it makes a profit. Bankers are not sure when the troubled carrier will turn around.
Hence, they stand to lose if the debt is turned into a quasi-equity instrument.
If AI is unable to pay dividend, banks have to take a hit of around Rs 8,000 crore (Rs 80 billion).
In addition, since the debt recast proposal also suggests a reduction in the interest rate from 12.5 per cent to 11 per cent, the quantum of the hit will only go up.
As a result, bankers have ruled out any equity participation in AI. Banks have already burnt their fingers by taking equity in another ailing airline, Kingfisher Airlines, whose shares tanked after banks bought stake.
Clearly, banks are not in a mood to take a hit on their profitability. "We are not in a position to take any haircut," said the chairman and managing director of a public sector bank who attended the meeting.
Banks also want a government guarantee for the entire AI debt.
At present, Air India has debt of Rs 43,000 crore (Rs 430 billion), and half of it is guaranteed by the government.
The debt-restructuring package is for the remaining Rs 22,450 crore (Rs 224.5 billion).
Banks also want a sizeable amount of capital infusion by the government upfront to reduce the burden.
The government has said around Rs 20,000 crore (Rs 200 billion) will be infused.
Banks want a large portion of funds committed by the government to be infused soon.
In addition, they want the Reserve Bank of India's dispensation for the restructuring.
Banks will have to make higher provisioning if a loan recast is implemented.
The move comes after the finance ministry raised concern on the debt recast plan on the ground that banks' capital adequacy ratio would be eroded if they took such a big hit. The banking sector is already reeling under the pressure of worsening asset quality due to the economic slowdown amid higher interest rates.
Most banks have seen an increase in non-performing assets in the current financial year.
Lenders to Air India have rejected the debt restructuring proposal of the troubled national carrier on the ground the plan would hurt profitability and erode capital.