The government late last month released Rs. 265 crore (Rs. 2.65 billion) to Air India to partially clear the interest burden to banks.
The cash-strapped national carrier has interest burden of Rs. 660 crore (Rs. 6.6 billion) for the months of April to June.
"The bailout provides temporary relief to Air India creditors, including Indian banks, but recurring defaults by the airline imply that government support may not be timely, which is credit negative for Indian banks," said Vineet Gupta, Vice President - Senior Analyst, Moody's Investors Service.
Air India has borrowed loans from a consortium of 22 banks led by SBI.
Moody's said that amongst rated banks, State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank, Central Bank of India and Oriental Bank of Commerce are large lenders to Air India and account for nearly 70 per cent of its loan exposures.
Air India currently has arrears in interest and salary payments. The banks have given Air India the deadline of July 31 to pay its interest dues, failing which it will be classified as a non-performing
If a company fails to pay installment (principal and interest) for three consecutive months, lenders have the right to classify the loan as a non-performing asset.
"If the company were classified as a non-performing asset, it would be a significant blow to our rated banks as they have lent up to 15 per cent of their core Tier 1 capital to the company," it said.
It would also stress to the banks' already strained profit and core tier 1 capital levels, and worsen the asset-quality indicators, Moody's said, adding, "In our estimate, this could increase the system-wide gross percentage of non-performing assets by nearly 100 basis points.
"We believe that the government has the ability and willingness to support strategically important companies as well as sovereign-owned public-sector enterprises, including banks. But the government has only provided temporary solutions to Air India's financial troubles.
"Also, the support was delayed and inadequate in our view as the government allowed the airline to delay paying employee salaries and bank interest. This poses concerns and raises doubts over the government's willingness to provide timely support to sovereign-owned public sector enterprises," it added.