Appeal of AI deal depends on rates offered by govt: SBI

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Appeal of AI deal depends on rates offered by govt: SBI

The appeal of Air India’s new debt restructuring package depends on the interest rates the government provides, says deputy managing director of SBI, Santosh Nayar.

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The appeal of Air India's new debt restructuring package depends on the interest rates the government provides, says deputy managing director of SBI , Santosh Nayar. "If the government's interest rate is very low, we will have to make a provision on the net present value of the whole amount," he explained.

Considering government bonds usually carry a lower interest rate than the market, Nayar says that banks will have to make a provision for the interest rate differential.

The Empowered Group of Ministers today approved a package wherein the cumulative redeemable preference shares (CRPS) issued by the national carrier will now be backed by government debt.

Below is an edited transcript of his interview with Latha Venkatesh. Also watch the accompanying video.

Q: We understand that the Empowered Group of Ministers (EGoM) has approved a fresh financial restructuring package where they are replacing the cumulative redeemable preference shares amount with government backed debt that is guaranteed by the government. Does that make the package more palatable to banks?

A: Yes, definitely it will.

Q: If it becomes a government guaranteed bond, how does life become easier for you?

A: Yes, but it also depends on the interest rate. If the government guarantees then the capital requirement goes down, but if their interest rate is very low, then we will have to make a provision on the net present value of the whole thing. So it also depends on interest rates.

Q: So you expect that a government guaranteed bond will carry a slightly higher interest rate than the preference share?

A: No, normally government guaranteed bonds always carry slightly lower interest rate. For normal investment purposes that's okay, but when you are substituting one debt with another debt the difference between the current interest rate and what is chargeable on the bonds probably the banks may have to provide for it in the balance sheet at present value.

Q: So at the moment if it is a government guaranteed bond you don't have to provide anything in terms of a net present value?

A: No, we will have to provide on the interest rate differential if the interest rate differential is there but we may save on the capital provision.

Q: So all told this will be a more palatable package?

A: Better than nothing. We will have to see the full details of the schemes for the banks. For State Bank of India we are a working capital bank and we have a cash credit limit. So we are a secured lender. Ours is not the term loan. Basically this will be replacing by accessing term loans.

Q: Who would be the other banks?

A: Very large number of banks. So we will have to work out and see how the final package evolves.

Q: Your sense is that with this replacement of preference shares by government guaranteed debt, the package may go through?

A: We don't know. We will have to wait for the individual banks to respond.