Airlines will be able to offset the adverse impact of rising fuel prices and a fall in the value of the rupee by raising working capital from foreign lenders
The government is considering relaxing norms governing external commercial borrowings (ECBs) to allow Indian airlines raise funds from foreign lenders. The Civil Aviation Ministry intervened with the government on behalf of airlines, who argued that they be permitted to tap funds from abroad through the ECB route for raising working capital.
The ministry has sought an amendment in the rules to enable a single company to borrow up to $500 million (Rs 3,450 crore). The cap for such borrowings will be set at $1 billion (Rs 6,900 crore) for the entire sector. Jet Airways and IndiGo (InterGlobe Aviation) had demanded that the cap on external borrowings be raised, a ministry official told Business Standard.
Indian companies are allowed to raise loans for meeting capital expenditure from offshore financial institutions including foreign commercial banks. The quantum of ECBs has increased over the years, peaking at Rs 200 crore in 2014.
The guidelines set down by the Reserve Bank of India (RBI) dictate that airlines can access external funds only for buying aircraft or engines. This implies that airlines will have to compulsorily acquire new assets and show it on their books before using residual capital for other expenditure.
The RBI had approved a similar scheme in 2012 when the aviation sector was facing financial pressure from global headwinds. However, it was discontinued in April 2016. The present crisis is on account of competition in the market which is preventing airlines from hiking ticket prices despite an increase in input costs. Results posted by airlines this earnings season have been underwhelming. The aviation industry is expected to post a loss of Rs 3,600 crore in FY19, according to the ratings agency ICRA.
Airlines will be able to offset the adverse impact of rising fuel prices and a fall in the value of the rupee by raising working capital from foreign lenders. Offshore commercial banks sanction loans at relatively low interest rates, enabling airlines with substantial debt to accumulate a large volume of funds with a lighter interest burden.
Moreover, dollar-denominated working capital loans will offer airlines leeway in negotiating the repayment of high-cost loans raised from the domestic market. Accessing foreign capital is important for domestic airlines since most of their working capital requirements are paid for in dollars. A weak rupee will inflate the cost of aircraft maintenance, spare parts, expat salaries, parking charges at foreign airports and aircraft lease rents.An airline executive contacted by Business Standard said the dollar-linked costs incurred by airlines amounted to 60-70 percent of total expenditure. However, the inferior creditworthiness of some airlines could come in the way of their raising capital through the ECB route.