India’s largest private sector lender ICICI Bank has agreed to lend Rs. 5,500 crore to Air India to refinance the cash-strapped national carrier, according to media reports. 

ICICI Bank will subscribe to non-convertible debentures (NCDs) to be issued by Air India at 9.8% to help lessen the airline's burgeoning debt, the report said. The state-run airline, which has been incurring losses since 2007 following a merger with erstwhile Indian Airlines, has a towering debt of Rs. 40,000 crore.

Air India, which has been servicing the loan taken for buying aircraft at over 12%, will pay interest every six months to the bank and has agreed to provide government guarantee to the lender.

The bond issue is expected to help the national carrier save around interest cost worth Rs.180 crore, the sources said. Earlier this month, Air India had announced that it has presented a turnaround plan to various banks.

The plan envisages that Air India would be made earnings before interest, taxes, depreciation, and amortisation (EBITDA) positive in 2012 and cash positive by 2014.

Air India had awarded the refinancing mandate to ICICI Bank earlier January, with a commitment to receive funding worth Rs. 55 billion. The government has also infused Rs.2,000 crore towards equity capital to restructure the troubled airline, and is due to pay Rs.1,200 crore more.