Having burnt their fingers with the now-defunct Kingfisher Airlines, it’s déjà vu for India’s banks.
And this time, it’s with Jet Airways.
While the lenders are looking for a way to salvage the debt extended to India’s oldest private carrier by picking up a stake in the company, they’d be well-advised to recall their bad experience of taking the same route when Kingfisher Airlines defaulted on payments, say many analysts that Quartz spoke to.
“Traditionally, banks are lenders and are not meant to be business-owners. Therefore, the fundamental principle behind this doesn’t make sense,” said a banking analyst at a rating agency, requesting anonymity. “Banks are much better off getting their money back instead of being equity shareholders as they may not be able to reap the benefits of it.”
The spectre of NPAs
On the last day of 2018, the financially embattled Jet defaulted on repayments to a consortium of lenders led by the State Bank of India (SBI). As per central bank norms, repayments not initiated within a 90-day window from the default must be classified as a bad loan—a non-performing asset (NPA) in industry speak—in the banks’ financial books.
The Naresh Goyal-promoted Jet owes over Rs10,900 crore ($1.52 billion) to 26 entities, including the Dubai branch of ICICI Bank and the Hong Kong branch of Punjab National Bank, besides SBI, the country’s largest lender.
The airline must pay back nearly Rs1,700 crore by March 31, else the loan will turn into an NPA.
The banks, saddled with a mountain of NPAs, are desperate to avert a further deterioration of their loan quality. Hence, they are undertaking a restructuring exercise, converting a part of their debt into equity. On Jan. 28, Jet said it will call an extraordinary general meeting (EGM) of its shareholders to seek approval for such conversion, which will partially resolve the airline’s financing problems.
Stripped of jargon, it means that in exchange for trimming Jet’s debt, the company will cede some stake to the lenders, making them part owners. Jet’s board will also seek to appoint new nominees and issue fresh preference shares, at the EGM on Feb. 21, it said in a filing to the stock exchanges.
Jet controls a sixth of India’s aviation market and it is in everyone’s interest to keep it airborne. Higher fuel prices, a weak rupee, and cut-throat competition have added to its losses. The government has refused a bailout and its efforts to find a strategic investor have come to naught.
As a result, banks have been forced to step in.