The interest rate on working capital loans of Air India may soon come down, as the finance ministry is likely to provide a sovereign guarantee for the airline's proposal to raise foreign loans.

In October, Air India had approached the government to raise $2.3 billion through external commercial borrowings as part of a plan to restructure its high-cost working capital debt of Rs 21,000 crore (Rs 210 billion).

A senior government official requesting anonymity confirmed the likelihood of gurantee banking.

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This will help the airline to bring down interest rates on working capital loans by up to 3 per cent.

The carrier's working capital debt of Rs 21,000 crore was borrowed at an interest rate of 12 per cent.

AI's annual interest payment is Rs 1,800 crore (Rs 18 billion) on a debt of Rs 40,000 crore or Rs 400 billion (Rs 21,000 crore or Rs 210 billion is working capital debt and the rest low-cost debt taken primarily to buy aircraft).

The airline has accumulated losses of Rs 15,000 crore (Rs 150 billion).

The carrier lost Rs 2,226 crore (Rs 22.26 billion) in 2007-08, Rs 7,189 crore (Rs 71.89 billion) in 2008-09, and Rs 5,551 crore (Rs 55.51 billion) in 2009-10.

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In its attempt to bail out Air India from its financial crisis, the government recently injected Rs 1,200 crore (Rs 12 billion) and Rs 800 crore (Rs 8 billion) in two tranches in 2009-10, raising the equity base to Rs 2,145 crore.

Officials in the civil aviation ministry say the first equity infusion of Rs 1,200 crore didn't change the situation much.

"The airline was asked to pay Rs 500 crore (Rs 5 billion) to oil companies and Rs 200 crore (Rs 2 billion) to spare part companies of the Rs 1,200 crore (Rs 12 billion).

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"The remaining Rs 500 crore (Rs 5 billion) went into debt servicing leaving nothing with the airline, which will need a huge amount of money to stabilise," said a senior civil aviation ministry official.

Air India has asked for another equity infusion of Rs 2,000 crore (Rs 20 billion) from the government to improve its financial condition and debt-equity ratio.

The carrier also wants to freeze pay rise and promotions for its 31,000 employees for the next three years. It has an annual wage bill of Rs 3,100 crore (Rs 31 billion) and will see 2,600 employees retire by 2014.