FDI, capacity correction can restore value in aviation: E&Y

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FDI, capacity correction can restore value in aviation: E&Y

Ashvin Parekh, partner & global leader, financial services of Ernst & Young says that the values in the aviation sector can be restored, if the policy response and the banking response are done in a collective and constructive manner.

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The aviation industry is going through a rough weather. As fears of a shutdown hover on Kingfisher Airlines , the banking sector is believed to be at the face of the storm. However, talking to CNBC-TV18, Ashvin Parekh, partner & global leader, financial services of Ernst & Young says that the values in the aviation sector can be restored, if the policy response and the banking response are done in a collective and constructive manner.

"The economic downturn has led to the rough patch in the aviation companies. However, reconstruction or working capital loan, funding this business till it becomes viable again should be possible," says Parekh.

Further, he is also condiment that the sector, like steel, will bounce back to become a robust industry soon.

Below is an edited transcript of Ashvin Parekh's exclusive interview to CNBC-TV18. Also watch the accompanying video.

Q: How tricky is the situation for the banks with the way aviation problems are shaping up? Do you think it might lead to significant asset quality problems for the public sector banks?

A: In 2001-2002 we saw a lot of restructuring around steel companies. There exposure of banking system was very large, in terms of total loan book size and the exposure that the banks had collectively taken up. When the economic downturns happen, or when a certain sector goes through difficulty, I suppose the policy response and the banking response if it is done in a collective and constructive manner, values can be restored and much later when the values are restored then the banks and the promoters can work out a way of sharing that value in growth.

Steel is an excellent example, when it came back with a good bounce then we are talking about now lending more to steel industry. It has become a robust industry once again, and I am confident it will happen with aviation as well.

Unlike what we saw in case of other industries, there isn't a capacity glut. However, on account of economic downturn, all aviation companies are going through a difficult patch at this point in time. However, reconstruction or working capital loan, funding this business till it becomes viable again should be possible and I suppose banking companies have started looking at it. They should be addressing more from that point of view.

The larger worry is not aviation but the larger worry is more amount of NPAs which will come out of various other policy areas, 2G for example and the complete banking exposure to 2G that is funding the 2G players is also going to be a major policy area which can bring a lot of risk to the banking system. So, we will have to really go through a constructive way of addressing these issues.

Q: Do you think the banks were fair and right in their move and might that come back to bite them?

A: Like any other business decision, the banking sector took a decision; the decision seems to have at least for the time being been a little more on the tax side or on the wrong side from value restoration point of view. However, that doesn't mean that you can now leave the whole argument half way. The system has to respond, the banking system will have to come back with some response to this.

Q: You were talking about comparisons with steel and saying that aviation will turnaround but the world of aviation is absolutely replete with examples of companies which have gone belly-up. Do you think it was a financial prudent decision that the banks were taking earlier and will probably take again, could there have been some political persuasion which might have led them to take such decisions?

A: Several external factors will play in making a particular business or a sector viable. Whether it is capacity correction at some stage or some consolidation that may happen at some other stage or the FDI decision is a critical choice. Either way, we will see that if there is value restoration, then we will go back and say we made some correct calculations, we were right in making a good judgement, the sector has turned around, the banking system has gained of it. If it doesn't, then it is like one business failed then we have to move on from there.

In this particular case, through proper policy corrections and through some major measures whether they are of the view of expanding the promoter equity base or whatever, some viable means will be worked out.