The Department of Economic Affairs (DEA), the policymaking arm of the Finance Ministry, has called for exempting airlines from a regulation barring Indian companies from using foreign debt, commonly referred to as External Commercial Borrowings (ECB) to repay loans from local banks.
According to a report, in a note put together in the first week of this month, DEA has said this could be considered because of the acute financial difficulties the aviation sector finds itself in. A final decision will be taken by a committee headed by the Finance Secretary. If the committee decides in favour of the airlines, it may have to face the same demand from other sectors.
A change in guidelines will, in the first instance, benefit Jet Airways, India’s largest airline by market share, which has sought approval from the Reserve Bank of India (RBI) to raise USD 750 million mostly to refinance its domestic debt to reduce cost of borrowing. The banking regulator is yet to clear the application.
Under rules that are currently in place, ECBs are subject to a set of so-called end-use restrictions. They cannot be used as working capital, the funds which are used for day-to-day operations such as paying salaries, or to repay existing rupee loans. “There is concern that similar demands may come from other sectors and the move should not set a precedent. But considering the financial difficulties of the airline industry and its importance in the infrastructure and transportation sector in the country, we are of the view that some relaxation in policy could be done,” said a senior Finance Ministry official.
DEA’s note is in response to the two letters from RBI detailing the financial distress facing the aviation sector and its discussions with banks which have lent to airlines. The first, on August 18, 2010 describes the problems of Kingfisher Airlines, owned by Vijay Mallya. The second, on August 24, 2010 deals with Jet Airways. Both are experiencing difficulties in repaying their loans, according to RBI. The letters are silent on the demand for a relaxation of ECB policy for airlines.